External Market Adjusts Dealer Financing Strategies
As vehicle sales have continued to decline, many dealerships have found themselves in dire financial straits. Even for those vehicles that are still being sold, dealers have had difficulty getting financing. The Federal Reserve Board' September survey found that one-third of banks tightened their lending standards on consumer loans.
The market is forcing dealers to re-evaluate their strategies and financial partnerships. Credit unions and dealers, long thought to be fierce competitors, are now working together more frequently and developing stronger relationships with benefits to both parties. Dealers have found financial partners that have money and are willing to lend, and credit unions have seen their pecking order at local dealerships rapidly rise to the top.
Through June, indirect loan balances at credit unions rose to $77.1 billion. This represents not only a record high, but also an increase of 9.0% in a market where overall auto lending has declined dramatically. Today, almost a quarter of all credit unions participate in indirect lending and indirect loans now represented 43.2% of the industry's total auto portfolio, also a record high.
This rise in indirect lending has a direct relationship with overall market share. In March of 2008, credit union auto lending market share was at a 5-year low, hovering just under 13%. In April the tide turned and credit unions began a steady march toward increased market share, peaking in January of 2009 at 22.7%.
This represents not only a record-high for credit union market share, but was also the first step towards a new era in credit union auto lending. Through August 2009, credit unions' year-to-date share of the auto lending market stands at 20.8%, representing an increase of 8 percentage points over the past 18 months.
The Indirect Trade-Off
The relationships credit unions have with local dealers has been critical to the success credit unions have found in both market share trends and on the balance sheet. However, there remain many credit unions wary of offering indirect loans. While a majority of criticisms revolve around concerns about member service and the potential loss of one-on-one contact with members, others fear that the loan quality of an indirect portfolio is lower.
Although auto loan delinquency and indirect delinquency are not specifically segmented on the 5300 Call Report, credit unions that offer indirect lending do report a higher overall delinquency rate on average. Through June, credit unions that did not offer indirect lending reported a delinquency rate of 1.35%, whereas those with indirect lending reported an average delinquency rate of 1.70%. This gap has widened over the past year to 35 basis points from just 7 basis points in 2008.
However for a quarter of credit unions, this potential increase in delinquency is a risk they are willing to take. Not only do these credit unions feel that they are providing increased convenience for their members by offering this service, but there is also data to show that indirect lending leads to faster growth in their auto loan portfolio. Credit unions grew their auto loan balances 3.39% during the year. During that same period, those credit unions that do not offer indirect lending saw their overall auto loan portfolios decline by an average of 5.6% during the same time period.
Finding the Right Balance
The key for any credit union is balance. While indirect lending may present more of a challenge from an asset quality standpoint, it also remains a crucial source of growth in this struggling environment. Those credit unions that aren’t seeing the auto loan growth they want in 2009 may want to investigate this service offering. While doing so they should also closely monitor their delinquency rates and credit criteria to ensure that they are providing the financing that their members need, while maintaining the high standards they have set for their own financial stability.
Read more on Indirect Lending.