Auto Buying Demand Improves, Hits Pre-Recession Levels
By Jose Torres, Senior Business Analyst, CU Direct
New and used November YTD auto sales figures are 8.3% and 3.6%, respectively, above 2012 levels, and if these trend holds up, the auto industry is on target to record 57.7 million units in sales in 2013; a level not seen since 2007.
New and used vehicle monthly sales averages surpass 2012 levels and more.
On the new cars sales front, as of November 2013, the monthly sales are averaging 1.30 million, again a level not experienced since 2007 (average of 1.35 million units). Moreover, the monthly figure of 1.5 million units recorded in August 2013 is the highest sales month since May 2007, which recorded 1.57 million units. The total sales units YTD for 2013 stands at 14.2 million units, and taking the December sales recorded in 2012 of 1.36 million units and applying the 8.3% growth seen thus far, the auto industry is on target to record about 15.70 million total unit sales. This sales level will easily surpassed the 14.49 million units recorded in 2012, and will be just below the 16.22 million units recorded in 2007. Increasingly, customers are opting to buy new vehicles versus used. New vehicle sales, as a proportion of total sales, have progressively risen year-over-year, recording 22.7%, 23.9% 24.8%, 26.3% for years 2009, 2010, 2011 and 2012, respectively. Year-to-date, as of November 2013, the momentum is continuing, as 26.9% of all customers are opting for new cars. In comparison, at the height of the economic boom in 2007, 28.1% of all customers were buying new cars.
Looking at the used car sales dynamics, as of November 2013, monthly sales are averaging 3.52 million units per month (more than 2 times the new car sales), a level not since 2006 (3.55 million units). The actual 3.10 million units recorded in November 2013 have surpassed all previously recorded monthly November figures since 2007. Total used vehicle sales year-to-date stands at 38.71 million, and again taking the units sold in December 2012 of about 3.15 million and applying the 3.6% sales growth seen thus far, the auto industry is on target to record about 41.98 million total used vehicle sales. Similarly to the new sales trend, the forecast sales will easily surpassed the 40.53 million units recorded in 2012, and should be well above the 41.57 million units recorded in 2007.
In terms of comparing the seasonality of monthly sales, during the period 2003-2012, the highest overall sales months have been June (5 of the 10 years), followed by July (4 out of 10), and August (1 out of 10). Combined June and July sales figures, on average, account for almost one-fifth of the auto industry’s yearly sales. When comparing the monthly seasonality between new and used car sales, their highest monthly sales varied noticeably. On the used car sales side, the pattern mirrors overall sales patterns (not surprisingly as used vehicles account for more than two-thirds of the sales activity). However, looking at new vehicle sales, there is not a clear “highest sales month” trend. For example, March and May were the highest months (3 of10 years, each), followed by August (2 of 10 each), and July and December (1 of 10 each).
Credit Unions are capturing their fair share of the auto lending pie.
When evaluating market share figures based on total auto loan balances outstanding among industry players, credit unions, collectively, truly stand out. With total outstanding balances of $679 billion in Q3 ’12, credit unions held about $153 billion, accounting for 22.5% market share (essentially 1 out of 5 auto loans is held with a credit union). The remaining balances were held by banks, $251 billion (37.0%), captives, $185 billion (27.2%) and finance entities, $90 billion (13.3%).
Looking at what has transcribed in the auto loan market place from Q3 2012 to Q3 2013, there was a net change of outstanding balances of $104 billion — essentially new loan demand in the market place (inclusive of loan pay-offs and refinancing activity) . A key performance indicator, or KPI, is lenders ability to capture its proportionate market share of new demand in the market place. Credit unions, which have captured $20 billion or 19.2% of the $104 billion in outstanding balances, have been effective in capturing their new loan demand piece of the pie. To put their collective success in context, despite aggressive competition from captives and finance companies, credit unions captured 19.2% of net new balances, about 3.3 percentage points below their 22.5% market share. Banks, with similar business lending practices did not fare as well. They only captured 26.0% of the net new loan balances, which is 11 percentage points below their 37.0% market share.
Looking at aggressive industry players’ performance, Finance companies captured 21.2% of the net new loan balances vs. their 13.3% market share and Captives captured 33.7% vs. their 27.2% market share.
Another KPI of how well lenders are doing in the auto lending market place is: how fast did it grow in comparison to the competition and the overall industry? Again, when looking at what took place between Q3 2012 and Q3 2013, we can report that credit unions grew their outstanding auto loan balances by 13.1%, outperforming their direct counterparts, banks , but underperformed the 15.3% overall market growth. Finance companies and captives did tremendously well, recording a net loan growth of 24.4% and 18.8%, respectively, whereas banks were the industry laggard with 10.8% growth.
Based on the overall rebound of auto lending activity over the last year, is your credit union positioned to take advantage of these favorable trends? Understandably, each market is different, but measuring your credit union on KPIs, will provide the necessary intelligence to adapt, manage and execute your credit union’s strategic plans more effectively. Moreover, knowing what typically are the highest sales months in your region and aligning your staff levels, your promotions, and executing them around the highest monthly sales figures within your local markets, will better position your credit union to capture a larger share of the growing auto lending pie.
Who is buying new cars?
When looking at the overall U.S. population, there are 80 million millennials (those in their 20s and early 30s) versus 76 million boomers. Moreover, about half of the millennials are already in the workforce, with millions joining every year. Looking forward, approximately 10,000 millennials will turn 21 every year in the U.S. Globally, by 2025 three of four workers will be a millennial. To address these demographic tectonic plates, auto makers have aggressively developed cars such as Chevy Sonic, Fiat 500, Ford Fiesta and Kia Soul, aimed squarely at their future customers: the millennials. However, according to this year’s registration data compiled by Edmunds.com, about 42% of the customers buying these cars were boomers, and this is up from 29% five years ago. That begs the question, why are seniors buying cars made for millennials? The answer really relies on the “commonality” that exists in both the millennial and baby boomer generation: cash-strapped 20-30 somethings and fixed-income seniors really just need a practical car that addresses their youthful mindset (boomers don’t want to look their age!), utility and budgets. More importantly, however, is that in terms of purchasing power, the largest customers of new cars are still seniors, as buyers 55 and older accounted for 40% of all sales, up from 33% in 2008; whereas buyers in the 18-34 age group represented 12%, down from 14% in 2008.
Based on CU Direct internal analysis of loan funded applications over the past two years [Nov. 2011 to Nov. 2013], limited to customers where the DOB was provided, or 70% of applications, interesting dynamics were found. Whereas in the industry, buyers 55 and older are responsible for 40% of new vehicle purchases, CU Direct credit union numbers are much smaller, accounting for 28.0% of new vehicle purchases and 21.2% of used vehicle purchases. The demographic is different for used vehicle buyers, as the 18-34 age group comprises 28.6% of total funded applications in the new vehicle category, while in the used vehicle space it jumps to 40.0%. In the 35-54 age bracket, new vehicle purchases account for 43.4% of total funded applications. Used vehicles are almost 5 percentage points lower, or 38.8% of all applications by CU Direct credit unions.
CU Direct credit union members within the 55+ age segment account for 28.0% of new vehicle purchases, but based on industry figures these members account 40% of new cars buyers. Conversely, and overwhelmingly positive for future prospects is that 72.0% of applicants that credit unions are approving are under the age of 55. Going forward, these present strong cross-selling opportunities, if credit unions segment, target, and position (STP) based on their new/used vehicle members status and demographic make-up. For example, if the auto loan customers are brand new to credit unions, cross-sell the anchor checking account and begin to educate them on the various products & services that your credit union offers. If they are already a member, then understand the impetus of car buying decision by looking deeper into their age and/or stage in life. Was a bigger car because of a new addition to the family? That equates to a cross-selling opportunity for a college savings account. Was it because of downsize? A retirement planning services cross-selling opportunity may be in order.
How is auto lending risk changing?
When reviewing the outstanding balances for all 60-day delinquent loans compiled by Experian, the overall delinquent balances have increased from $3.37 billion in Q3 2012 to $4.05 billion in Q3 2013, an increase of $680million or 20.2%. Loan growth in the same period, however, was 15.3 %, meaning risk balances are growing faster than overall loan demand. Captives risk balances increased the most going from $542 million in Q3 ’12 to $798 million in Q3 2013, or 47.2%, followed by finance companies, $1.43 billion to $1.73 billion, or 21.2%; credit unions $376 million to $424 million, or 12.8%; and banks $1.02 billion to $1.10 billion , or 7.2%. More importantly, the 60-day plus auto-loan delinquency ratio, as a percentage of total balances outstanding, have slightly increased 2 basis points to 0.52% from 0.50% a year ago.
With the exception of captives, which increased their delinquency ratio from 0.29% to 0.36%, banks (0.41% to 0.39%), credit unions (0.25% to 0.25%) and finance companies (1.58% to 1.54%) were all able to reduce or maintaine their previous year overall risk levels. The opportunity for doing more auto lending is ripe for credit unions; Banks currently have a delinquency ratio of 0.39% with outstanding auto loans balances of $278 billion, while credit unions have a delinquency ratio of 0.25% with outstanding auto loan balances of $173 billion. Credit unions, implementing similar conservative lending policies and risk-pricing as banks, can compete for the $100+ billion difference currently on the books ($278 billion vs. $173 billion), as well as new loan demand. Case in point: of the $104 billion of net change in loans outstanding from Q3 2012 to Q3 2013, banks grabbed $27 billion (26.0% of total), while credit unions captured $20 billion (19.2% of total).