One of the traditional indicators of consumer sentiment – purchases of new vehicles – may next year reach levels not seen since 2005, according to a major automobile dealers trade group – and that’s good news for financial institutions dealing in automobile lending.
The National Automobile Dealers Association (NADA) recently predicted new car and light truck sales to total nearly 17 million next year, revising its forecast slightly upward, to 16.94 million, from the original 16.8 million it first predicted.
NADA Chief Economist Steven Szakaly, in announcing that forecast, said that rising employment and wages, continued low interest rates and lower gas prices all pointed the way toward increased demand for new automobiles.
Banks and credit unions that book auto loans say they’ve noticed a steady uptick in business over the past few years and they expect a strong year ahead in 2015, too.
“Over the last three years, the number of new cars sold has been increasing at a very steady pace,” said Chris Downs, executive vice president, consumer lending and auto finance, Belmont Savings Bank. “I think there is a lot of pent-up demand that occurred with the debacle of 2007–08. People postponed buying cars and the leasing business dropped away. People are buying new cars. I don’t think there’s any reason why we shouldn’t see another very strong year in 2015.”
Belmont Savings Bank entered the indirect auto lending business in 2010, and Downs estimates the bank will probably make about $10 to $12 million in auto loans per month next year. He added that’s probably less than 1 percent of the total auto lending business in New England.
While the residential mortgage loan has often been considered the bread-and-butter for many community financial institutions, auto loans represent a way to balance out all those long-term, low-yield assets on their loan portfolios.
“You don’t want to be loading up on too many long term assets, especially if you think rates might be rising,” Downs said. “[Auto lending is] an opportunity for us to put on very high quality assets efficiently and use our balance sheet effectively.”
“Right now, we’re in the middle of a net interest margin squeeze. We’re expecting rates to go up at some point in the near future, and we like loans that will re-price more frequently,” said Thomas Nadeau, chief operating officer of Metro Credit Union. “With indirect or direct auto loans, about half of your portfolio will re-price in about 12 months.”
Do It Fast, Do It Well
Auto loans at the top 25 credit union auto lenders totaled $48.37 billion in the third quarter this year, representing a quarter-over-quarter increase of 5.06 percent and a year-over-year increase of 15.97 percent, according to a recent analysis from SNL Financial.
But for credit unions, auto loans are more than another product to offer customers or a way to diversify the balance sheet. Indirect loans can also serve as an introduction to the credit union for car buyers.
And while Experian Automotive recently released data showing that 30- and 60-day delinquencies in auto loans during the third quarter increased year-over-year by 3.7 percent and 8.6 percent, respectively, the firm also pointed out that that uptick in delinquencies is due largely to growth in the subprime loan category. The majority of the market, Experian said, is still in the prime risk category.
Metro Credit Union deals exclusively with prime and super-prime credits, Nadeau said. To do that well, you have to be competitive on rates and flat fees, and you have to have the staff and infrastructure in place to make those deals happen fast.
“You have to give them a quick answer on the loan, you have to do what you said you would do and you have to give them the money quickly,” he said.
Downs agreed that indirect auto lending is not exactly a piece of cake.
“The competition is fierce, and we certainly see that on the financing side. There is a lot of competition for auto loans right now, so to do it well, you’ve got to have the right people and the right technology in place,” he said.
Because a dealer will typically send an application out to several lenders at once, Downs estimated that Belmont Savings probably books only about 20 percent of the deals it looks at.
“The temptation is to get into the business, but you do have to have the right people and the right technology. It can be a tough business,” he said. “There are some very irrational players out there competitively that are … just not pricing for the risks they’re taking. I think you just have to be very careful about what you do as a lender.”
Email: lalix@thewarrengroup.com
