By Ray Birch
LOMBARD, Ill.—The number of new cars available for sale is driving up projections for annual new units sold in 2023—with some forecasts expecting the figure to reach 15.5 million. But that may not be all good news for lenders, one analyst is saying.
That’s because lenders are going to need to respond by tightening policies, watching indirect growth and keeping an eye on liquidity, said Bill Handel, SVP of research at Raddon, a Fiserv company.
The reason for all the concern lies in the fact credit union lending portfolios have been growing steadily even as the number of actual cars sold has tapped the brakes, thanks to the soaring prices of new vehicles. The combination of already bulging auto portfolios, the fact the number of loans is likely to increase, and a possible softening of the economy could combine to pose trouble for lenders across the nation, said Handel.
Issues Beyond Availability
Handel said his concerns center on more than just increasing automobile availability.
“We should anticipate continued growth in vehicle portfolios as the consumer doesn't seem to be slowing down, which is really interesting,” said Handel. “Despite all economic indicators, consumers are still continuing to spend. They're still employed…I think we will see some good growth in the vehicle portfolio space this year; you just need to manage the risk.”
Looking at sales data for the first six months of the year, U.S. new car sales are 13% higher than at the same time in 2022, pointed out Handel.
“New car sales are coming back. We’re tracking to about 15.5 million light new vehicle sales for the year. That's a pretty decent number,” he said. “Interestingly enough, it's still lower than pre-pandemic levels.”
The Big Difference
Bill Handel
But the big difference between now and pre-pandemic is the price of cars has elevated so much it has created a “massive” level of automobile debt, Handel said.
“In fact, automobile debt is the fastest-growing category of debt since the onset of the pandemic, growing about 20% in aggregate,” Handel said. “If we do, indeed, move into a softer economic environment and you've got higher-priced cars, and then you've got some default activity going on, potentially there is some risk in U.S. lender’s portfolios.”
Handel said he would not classify it as huge risk.
“As an industry we really have to pay attention to good lending practices now,” he said. “The key point to be made is we are finally beginning to see a freeing up in the in the vehicle space—some of the restrictions that were happening, supply chain issues…those have been largely solved. Now you're seeing more vehicles available. And I believe you'll see some level of discounting begin to happen. I think we will begin to see less upward price pressure than we have seen in the last couple of years.”
As CUToday.info reported here, in late June Pete Hilger, CEO of Allied Solutions, which offers repossession services to CUs among other solutions, told NAFCU’s annual conference he expects to see a surge in keys being turned in—whether voluntarily or involuntarily, as repossessions spike.
The L Word
Turning to the “other” problem facing lenders, Handel is worried about liquidity.
“Obviously, there's the whole issue of liquidity. Just to make sure that you're taking prudent risks and recognizing that we may be moving, in the second-half of the year or the first part of 2024, into a softer economy,” he said.
Handel said lenders won’t need to brace for negative GDP, just a softening of economic growth.
“So, we will begin to see more economic pressures. But how long have we been saying that and it hasn’t come to fruition,” he reminded. “I think lenders should be paying attention to the fact those pressures may grow.”
Pressures From CRE
The economic pressure, to some degree, will be fueled by problems with a different loan portfolio, Handel believes.
“That could really drive us towards more economic softness, the losses some lenders are going to see in their commercial real estate portfolios,” he said. “Just be aware of what might be coming and make sure you're doing prudent lending on automobiles. I would say emphasize the direct side of the business more, as opposed to the indirect, because indirect can tend to get out of your control, in some ways. You may not have the same level of control and lending on the indirect side, so, you have to really manage relationships with the dealers and focus here more on higher-quality paper.
‘The Critical Issue’
“Overall, I think you will be OJ if you have, as an organization, said we're going to manage the entire business in such a way that we manage that risk appropriately, knowing lending can only grow at a certain pace,” Handel continued. “Make sure you've got the right mix in quality of credit. You can go for a little more diversity in terms of the type of paper that you're taking (on the direct side) in order to help with the yield, that's all fine. But just do it in in a prudent fashion. That is the critical issue.”