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Don’t Hit Cruise Control on Auto Loans

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Auto sales, which have been at record levels and hit a peak of 17.8 million units last year according to CU Times, may be reaching a plateau. If your earnings are heavily reliant on sustained and significant production in auto loans, think strategically about the following:

  • There are indications of changing behaviors affecting market demand. Licensed drivers as a percentage of their age-group population
    • In 2008, 65.4% of 18 year-olds had a driver’s license. Now, that is down to 60.1% (Source: Yahoo! News).
    • In all age groups from 16-69, the percent of Americans with a license has fallen since 2008 (Source: Yahoo! News).
  • It is important for decision-makers to think through potential implications if these trends continue. Not only could it impact loan demand, but consider possible reduction in non-interest income as a result of reduced sales of related insurance products, as well as the impact on membership growth, particularly for those credit unions that are heavily reliant on indirect lending.
  • Credit risk appears to be on the rise. Some of the increase could be by design as more credit unions have strategically taken on more credit risk.
    • According to TransUnion, the national auto loan delinquency rate increased from 1.16% in Q4 2014 to 1.24% in Q4 2015 – the highest level since Q4 2010 when auto delinquency hit 1.22% (Source: CU Today).
    • According to Callahan & Associates, since 2013 (when this data for autos first became available for autos), credit union auto loan charge-offs are up from 0.43% to 0.62% in 2016, a 44% increase.

Callahan & Associates Total Auto Loan Net Charge Offs Graph

  • According to American Banker, industry analysts are communicating expectations for used car values to fall significantly in 2016 and 2017, as a large number of leased vehicles come back into the market and create a glut of inventory.
    • This could also impact credit risk. But consider the impact it could have on loan production. If the average prices are lower, how many more auto loans would you need to make to have the same loan volume? If it is materially more, what is the impact on operations?

Many credit unions have enjoyed significant growth in autos.

Callahan & Associates Direct & Indirect Auto Loan Growth Table
As you strategically evaluate your competitive position with respect to auto lending, don’t lose sight of these three basics:

  1. Fierce competition for auto loans is a fact. With credit union net interest margins below 3% on average, pricing effectively for risk and profitability is not optional. And this means taking it to bottom-line profitability. Don’t stop at the margin when analyzing pricing.
  2. Material decline in autos loans can directly impact other strategic initiatives, particularly those that are costly. You have to generate money to spend it!
  3. Markets change, sometimes quickly. Keep aware of the industry and competition in the market. Identify trends. Listen for concerns. Ensure the ALCO and the board are informed and discussing the potential impacts to the credit union’s booked loans as well as new business efforts, especially if the credit union is highly reliant on continued new production of auto loans.
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Data Mining Could Lead To Revenue Streams

Marketing isn’t what it used to be.  As with most disciplines, marketing has evolved rapidly in this technological age.  Credit union marketing strategies need to evolve, too.  It has been reported that Amazon’s conversion to sales from recommendation could be as high as 60%. Why?  Because they understand how to mine their customer data and make relevant recommendations to their customers.  We’re all bombarded daily with thousands of marketing messages from billboards, radio, TV, the Internet, magazines, etc.  It makes sense that recommendations that actually interest your members are much more likely to result in sales than a shotgun approach.  Target is so good at understanding their customers’ buying patterns that they reportedly are able to identify who is expecting, and send maternity and baby ads to them without the customer ever mentioning that she is expecting.  It’s not necessary to go that far.  In the credit union world, there are institutions that have implemented very sophisticated data mining and those that have yet to consider such an approach.  In this era of tighter competition, effective sales and marketing is key to success.  Even the smallest credit union has data on member payments to other institutions and information on when loans are paid off.  It may be easy to identify major life changes such as a move or birth of a child, which are prime times to replace old buying habits with new ones.  Simple data mining can help your organization take a step in the right direction.
Even if you start small, just get started.
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Not All Growth Is Good

According to a recent Wall Street Journal article (‘Free’ Checking Costs More, 9/24/12), “free” checking accounts are on the decline. The article cites a Bankrate survey of banks indicating that just 39% of non-interest checking accounts are free to all customers, down from a peak of 76% just a few years ago in 2009. Banks have increased minimum balance requirements, overdraft charges and monthly service fees. They have also increased ATM surcharges. According to the banks, the increase in fees is needed to offset the stagnating economy and new regulatory burdens.

Credit unions, too, are operating in the same environment. Low interest rates, lackluster loan demand, and increased regulatory burden are squeezing credit union earnings. The increase in “free” checking fees at banks may drive more of their customers to credit unions. If this happens, it would be a mistake for credit unions to assume that growth in checking accounts naturally leads to increased profitability. It will remain important to understand what other products new members are using and the number of transactions they are performing. Additionally, threats to interchange income and overdraft fees remain and could change the profitability of checking accounts in the future. In the end, credit unions need to stay focused on growth in the target market. Not all growth is good, not even when it comes from checking accounts.

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Lessons From Bank of America’s Scrapped Fee

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Bank of America announced Tuesday that it would not proceed with its plan to charge its customers a $5 per-month debit card usage fee.  The announcement has been claimed as a victory by many groups, such as the “Occupy Wall Street” movement, but for businesses everywhere, including credit unions, the announcement reinforces some lessons.

The power of the internet/social media: A 22-year-old BofA customer launched an online petition shortly after the bank announced the proposed debit card fee.  Reports indicate the petition drew as many as 100,000 signatures within a week.

The internet is a double-edged sword for businesses.  It can be used to generate buzz about exceptional service/products.  It can just as easily inform potential members/customers of policies or services deemed “bad.”  Think through social media strategies carefully and “what if” them with the bad things that could happen, and what the response might look like.  Also ask the question, do we need a social media strategy?

The importance of thinking through actions before implementing them: How does BofA’s decision to scrap these plans make them look to the public—like a corporation that listens to its customers, as they claim, or as a desperate one, grasping at straws and not thinking through their actions?  How will this affect their reputation?  Arguments can be made on either side, but many are left wondering what else the bank has up its sleeve.

A question more specific to credit unions is, what affect, if any, will this news have on November 5th’s Bank Transfer Day, the day designated for Americans to close their accounts at big banks and move their funds to smaller banks or credit unions?  Will consumers who were going to participate still move their banking, or was the debit card fee a big decision driver for them and now they will stay put?  Only time will tell.

What do you think?  Click here to let us know what you think will happen on Bank Transfer Day.

Source:  Under Pressure, Bank of America Drops $5 Debit Card Fee

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Back In The Subprime Game

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In a recent issue of the Wall Street Journal, Lewis Ranieri—once known as the father of mortgage finance—said it is time for nontraditional lenders to enter the market, bringing with them a return to subprime lending.  Ranieri said “the pendulum has swung too far in the other direction,” meaning that lending standards were once too loose and are now too rigid.

The implosion of subprime loans four years ago set off a domino effect that continues to impact global economies today.  As financial institutions struggle to regain their footing, lending opportunities have narrowed for all but the most creditworthy applicants.  Yet lending is a material source of income that could help financial institutions to recover and thrive.

The collateral damage from this recession varies by state.  If your credit union is ready to loosen underwriting standards—even if you stop short of subprime lending—it will be important to strategically plan for all variables involved.  The scars earned in the current economy should serve as a sufficient reminder to avoid being burned in the future.

(Sources:  Pioneer to Revisit Subprime, WSJ, 6/24/11 and Image by Bart Claeys)