Bankers View CU Loans as Tasty Chum
When it comes to auto loan portfolio acquisitions, some might see credit unions as the equivalent of little fish being circled in waters full of sharks–banks and other lenders.
Indeed, there’s plenty of flesh to devour. Auto loan and lease originations topped the $367 billion mark in 2011, a 12.5% jump from $326 billion in 2010, according to Auto Finance News.
Within the credit union industry, auto lending continues to be the leader in many loan portfolios. During the first quarter, market share was at 14.6%, with used auto loans surpassing new ones at 19.1% and 11.1%, respectively. Overall, credit unions finished the first quarter at $582.3 billion in total loans.
Some of the nation’s largest banks have taken notice as they seek to expand their auto lending footprint.
The $178.5 billion BB&T Corp. in Winston-Salem, N.C., confirmed with Credit Union Times that it recently purchased a credit union’s auto portfolio, said Merrie Betbeze Tolbert, vice president of corporation communications.
“However, we have a confidentiality agreement with the credit union and cannot provide any other information,” Tolbert said.
BB&T is certainly in a strong position to shop for more assets. On July 31, the bank announced it had received regulatory approval to acquire BankAtlantic Bancorp and its $3 billion in core deposits.
Wells Fargo & Co. also announced it will widen a previous deal with General Motors Corp. to provide financing for Buick, Cadillac, Chevrolet and GMC dealers. The $1.3 trillion bank based in San Francisco said it provided $20.2 billion in indirect auto loans to nearly 12,000 dealers in 2011.
While the buying of auto loan portfolios aren’t new within the financial services industry, it’s uncommon for banks to bid for those at credit unions, said Eddie Nevarez, vice president of business development at the National Auto Loan Network in Newport Beach, Calif., which counts more than a dozen credit unions among its clients.
“Due to the risk involved, most credit unions are still shying away from auto loan portfolio acquisitions,” Nevarez said. “In my experience with credit unions, most are still very conservative and staying away from acquiring auto loan portfolios. But, that is not to say that I have not come across some credit unions that are aggressively seeking to acquire what has always been the life blood of credit unions.”
It may be hard to track data on the number of credit unions that have either sold off all or a portion of their auto loan portfolios. The NCUA is currently in the process of reviewing several bids for the sale of Telesis Community Credit Union’s stake in Autoland Inc., a vehicle buying CUSO. The financially troubled $307 million cooperative in Chatsworth, Calif., was recently liquidated, and its assets were bought by the $1.3 billion Premier America Credit Union.
Melinda Zabritski, director of automotive credit at Experian Automotive, said she can see why others outside the industry would be intrigued by what credit unions have to offer.
“I would expect credit union portfolio acquisitions would be healthy acquisitions because they have very low delinquencies,” Zabritski said. “Credit union portfolios would make a lot of sense for loans in the prime space.”
From the end of 2011 to the end of the first quarter this year, total credit union delinquencies dropped from 1.60% to 1.44%, according to data from CUNA and the NCUA. During the same period, net charge-offs declined from 0.91% to an annualized total of 0.79%.
Experian doesn’t necessarily track portfolios from a credit standpoint, but from the consumer’s angle, the firm can see when portfolios are sold, Zabritski said. One example might be when a credit card portfolio changes hands.
“Portfolio acquisitions occur on a regular basis in the auto industry. It’s not something new,” Zabritski noted. “What I tend to see is more activity in the subprime space and with finance companies and banks.”
Whether there has been a surge in auto loan portfolio acquisitions depends on the perspective. Rohit Arora, CEO of Biz2Credit, a New York firm that links lenders with small business owners, offered insights on what he’s observed.
“The auto industry hit rock bottom in 2009. Americans have been driving older cars, holding onto them five to seven years, when they used to trade them in every two to three years,” Arora said. “There was pent up demand, and now, people are buying new cars again. Thus, auto loan portfolios have become more profitable.”
Typically, credit unions are the sellers and are likely to be open to sale opportunities in the secondary market, Arora said. Because of their local community ties and reputation for helping members with their financial needs, originating auto loans has become a staple, he said.
Nevarez believes, in general, auto loan portfolio acquisitions have slacked off. Some notable exceptions are banks such as Santander Consumer USA, Bank of America and subprime finance companies that have acquired large auto loan portfolios going back two to three years.
“The motivation behind purchasing auto loan portfolios varies from institution to institution. Some are looking for a return on investment, while others are looking for market penetration or an increase in loan to asset ratio,” Nevarez said.
Another motivation may be purely for profit, Zabritski said. Portfolios are going to generate income without having to incur the initial origination costs. Many of those interested in buying are indirect lenders, she noticed.
“It’s a great way to gain a footprint to diversify the portfolio,” Zabritski said, adding there’s a litany of analysis that goes into purchasing portfolios, from digging through delinquency records to deciding whether to purchase just blocks rather than the entire portfolio.
If a credit union is considering selling some or its entire portfolio it should be sure to optimize the revenue from the sale, Nevarez advised.
“Credit unions should be careful to not make hasty decisions to sell and get out,” he suggested. “With the proper portfolio analysis, either done internally or by a third party, credit unions can better present the opportunity to potential buyers and receive multiple bids.”
Like any other investment, Arora advised credit unions to do their due diligence and utilize good risk management tools. Just because a sale goes through doesn’t mean that credit unions are completely free to walk away with the funds. For instance, if the new owner was not responsible with collections, the seller should not be held responsible, he explained.
“You don’t necessarily sell once and then get off the hook,” Arora said. “As a period of time goes by, the seller loses responsibility for defaults. You have to negotiate smartly.”
Some banks are motivated to buy because it’s a clear case of supply and demand, said Denny Graham, president/CEO of FI Strategies LLC, a St. Louis-based strategic planning firm that serves credit unions and banks.
“It’s no different than what’s happening with credit unions. Banks are buried in deposits and they need to get some loans out,” Graham said.