Credit unions increasingly developed indirect auto lending programs over the past few years, despite intense competition in auto lending, the record-low interest rate environment, and enticing offers and incentives from captive finance companies.
Indirect lending seems to boost 12-month auto loan growth even with with intense competition in the auto lending market, although credit unions with indirect lending tend to lag in loan yields.
To measure whether or not indirect lending had a positive impact on credit unions, Callahan & Associates compared credit unions with indirect loans to those without. Credit unions without indirect loans were limited to those with more than $50 million in assets to achieve a similar average asset size, and therefore a more accurate comparison to credit unions that participate in indirect lending.
The average amount of outstanding auto loans is nearly twice as much at credit unions with indirect loans as those without them, with an average balance of $65.6 million compared with $36.3 million. The annual growth of outstanding auto loans reveals a similar trend. Credit unions that do indirect lending have annual growth of auto loans of 4.0%, which is more than twice as fast as the 1.8% for their direct lending peers.
Indirect Lending Credit Union Comparison
Data as of March 31, 2012
Source: Callahan & Associates' Peer-to-Peer Software.
In spite of both higher balances and faster growth in auto loans, credit unions with indirect loans have an average overall loan yield 20 basis points below the 5.69% of credit unions without indirect loans. This is true even though credit unions with indirect loans have a larger average base of outstanding loans to earn interest income from.
Credit unions with indirect loans do report an ROA that is 10 basis points higher than their non-indirect lending peers, even though their operating expense base is also higher. However, the higher ROA is primarily due to a higher amount of non-interest income, a lower cost of funds, and a smaller provision for loan losses.
Indirect loan delinquency was 76 basis points in the first quarter for credit unions that participate in it. Delinquency for all loans, except indirect, at these credit unions was 1.58%, and the overall delinquency rate was 1.43%. Overall delinquency at credit unions that don’t participate in indirect lending was 1.48%.
As new auto sales continue to drive ahead, competition in the auto lending market will likely continue to be strong. Credit unions must balance the need to make loans with available funds while being mindful of managing interest rate risk. Indirect lending can benefit credit unions, but credit unions should be conscious of the intense competition in both indirect lending and new auto lending.