ONTARIO, Calif. – The auto industry is booming and credit unions are taking advantage by outperforming the market in booking auto loans.
During a webinar hosted by CU Direct, both Jose Torres, senior business analyst for CU Direct, and Steve Szakaly, chief economist for the National Automobile Dealers Association (NADA), said there is more good news ahead as lower gasoline prices are spurring higher sales of trucks.
Torres reported total new car sales set a new record in 2015 with 17.5 million sales. He said the previous best was 17.4 million in 2000. "And we expect another record in 2016," he said.
Industry analysts project 17.7 million new cars will be sold this year. Light truck and SUV sales are "dominating" the market, Torres said, accounting for 61% of sales during the month of December 2015.
"Credit unions have been stellar in their performance," Torres appraised. "Credit unions are financing more full-sized trucks than all other lenders."
CU Direct credit unions are "outperforming the market," Torres continued. He said this subset captured more than 1 million loans in 2015 – a record, and placing CU Direct CUs as the No. 3 auto lender behind Ally and Wells Fargo and ahead of Chase and Capital One.
"We see that as an indication of the respect credit unions have in the marketplace," Torres said.
Overall, credit unions booked 24% of all auto originations in Q3 2015. Torres said CU lending is "heavily" to prime borrowers – those with credit scores in the 661-to-780 range. Credit union portfolios reached $257.9 billion in Q3 2015, up from $224.7 billion in Q3 2014.
Most of that increase was at the expense of the captives, Torres noted.
"Credit unions have done a really good job of capturing auto loan demand that is out there, and we expect this to continue," he said, citing continued CU membership growth. "As more people understand the mission of credit unions, they embrace credit unions. Big banks were hit by scandals and failures during the financial crisis, and credit unions are seen as a more wholesome alternative."
According to Torres, the indirect lending channel is helping CUs bring in not only new auto loans, but new members. He said members with auto loans now have higher net promoter scores than those who do not, and they are more likely to take out mortgage loans and carry credit union credit cards.
Delinquencies (0.64%) and charge-offs (0.56%) by indirect lending members are at historic lows, he said. However, he raised a concern that credit unions are "underpricing" risk in used-car financing. "They may need to adjust their pricing," he advised.
Interest rates are beginning to adjust upward in the wake of the Federal Reserve's decision to finally raise the Federal Funds Rate two months ago, but Torres said they remain historically low.
Tailwinds and Headwinds
Szakaly said new vehicle sales have increased year-over-year each year since bottoming out in 2009. He reported NADA estimates sales will reach a peak in 2016 with 17.7 million units, before declining slightly to 17.5 million in 2017, 17.1 million in 2018, and 16.7 million each in 2019 and 2020.
"The forecast for both new and used vehicle sales is strong in the years ahead," he said.
The auto sales boom has come despite a long-running trend of vehicles lasting longer. Szakaly said in the early 1970s the average age of the U.S. light vehicle fleet was less than six years. That figure topped seven years in the early 1980s, then nine years in 2000. Today it is more than 11 years.
"Vehicle life has shown continuous improvement since 1970," Szakaly said. "This is a phenomenal case of car buyers getting more value. This is good, because a consumer cannot borrow for six years on a car that lasts three years. But there is nothing wrong with borrowing six years on a car that lasts 12 years."
In the last three years, car prices have increased faster than wages, he noted. However, most industry analysts no longer expect a rapid rise in interest rates.
Regulatory costs are impacting vehicle prices, Szakaly continued. He said the regulatory costs per vehicle have climbed to $2,700 to $3,200, depending on the make.
"The industry has three major tailwinds right now: low oil prices, a strong labor market and low interest rates," he assessed. "Three major headwinds are the consumers buying cycle, the impact of regulations and the economic slowdown in China. We expect auto sales in China to decline in the years ahead, which will hurt European auto manufacturers.
