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Credit union auto loans growing, but some bracing for eventual slowdown


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Credit union auto loans growing, but some bracing for eventual slowdown

Credit unions again reported strong year-over-year growth in auto loans. But with U.S. car sales projected to decline in 2019, some lenders are looking to diversify their balance sheets.

Aggregate auto loans held on U.S. credit union balance sheets rose to $365.27 billion as of Sept. 30, 2018, a 10.8% increase year over year, according to S&P Global Market Intelligence data. At the end of the third quarter of 2017, credit unions had $329.58 billion in auto loans.

Aggregate used vehicle loans at credit unions totaled $219.73 billion at the end of the third quarter, while new vehicle loans at credit unions reached $145.54 billion at Sept. 30, 2018.

But car sales appear to be slowing. The National Automobile Dealers Association released a forecast Dec. 13 projecting that new vehicle sales will drop 1.1% in 2019. Vincent Hui, managing director of credit union consultant Cornerstone Advisors, said credit unions are looking to diversify away from vehicle lending in general given the slowdown in car sales and, in some cases, balance sheet concentration.

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Despite the projected slowdown, some credit unions are experiencing a rebound in auto lending. Michigan First CU, which operates in the shadows of the big Detroit auto manufacturers, saw a 5.1% year-over-year decrease in auto loans after the first quarter of 2018. But the Lathrup Village, Mich.-based credit union had $118.5 million in auto loans at the end of the third quarter, which equated to 10% year-over-year growth.

President and CEO Michael Poulos said the credit union continues to be positive about auto lending, although rising rates are having some impact. "For a spectrum of the buying public, the higher rates just impact the amount of car someone can buy, but doesn't keep them from buying," he said in an interview.

Competition for auto loans remains strong, but Michigan First continues to broaden its dealer network to address some of the volume issues, Poulos said.

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And Michigan First is not alone in seeking auto loan growth via the indirect route. Needham, Mass.-based Direct FCU had $129.3 million in auto loans at the end of the third quarter of 2018, which equated to a 38% year-over-year increase. President and CEO Joseph Walsh attributed the growth primarily to the indirect portfolio. About 70% of the credit union's new members come through the indirect auto lending channel, and membership has been growing quickly, Walsh said in an interview.

Hui said many credit unions are anticipating an economic downturn within the next 24 months, and are thus seeking out more profitable direct loans. Credit unions also recognize that they have better opportunities to control the member experience and build deeper relationships with direct lending because most members think about their relationships with indirect loans as being with the dealer.

"In other words, indirect loans are more transactional while direct have greater potential to be relational," Hui said.

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Direct FCU's Walsh said better mining those member relationships is key, especially in the fiercely competitive market for vehicle loans. Auto loan penetration, or the number of vehicle loans as a percentage of total credit union members, rose 8.93 percentage points year over year for the credit union, marking the 13th-largest increase for any U.S. credit union with at least $50 million in vehicle loans.

In the long run, factors like the growth of ride-sharing could also impact auto lending, Walsh said. Direct FCU is trying to achieve overall balance sheet growth so it is not relying too heavily on auto, and if the credit union comes to believe major macro trends will affect auto loans in any given year, it will attempt to make it up through its credit card portfolio or other forms of unsecured loans, Walsh said.

"I have always been and remain very confident that if we lose a little bit here we will be able to more than make up in another segment of the portfolio," Walsh said. "There's zero reason to push the panic button."

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