Challenges & Opportunities in ’09

Steve Rick, CUNA Senior Economist
January 21, 2009 | COMMENTS

Peering into their crystal ball, CUNA economists expect credit union savings balances to rise 8% in 2009. Volatile equity markets, falling home prices, and worries about an deepening economic slowdown will lead credit union members to increase their savings balances at a pace not seen since the last recession seven years ago.

But even as members will be saving more, deposit competition from other financial institutions will be fierce. Also, financial institution failures will make members nervous about share insurance, so now is the time to educate your members about the credit union share insurance fund.

CUNA has developed a statement stuffer titled Credit Unions: Safe and Sound to help credit unions explain the benefits of deposit insurance to their members. Go to buy.cuna.org and enter Stock No. 22959 in the product finder.

The current low interest rate environment will decrease members' willingness to roll over maturing share certificates. Credit union share certificate balances grew only 2.2% in the first half of 2008 compared to 7% for the same period last year. Credit union members are placing their funds in liquid regular share and money market accounts, which rose 5.8% and 14.6%, respectively. It will be very important to look for ways to get a greater share of member deposits and using segmented deposit pricing.

CUNA economists expect the national savings rate (personal savings to disposable personal income) to rise to 3% in 2009 after two years of near zero levels. Of course, more savings by households out of current income results in less spending, leading to a slowing economy.

Credit union loan portfolios are expected to grow 8% in 2009. Credit unions will pick up market share in the mortgage sector as banks tighten their mortgage loan underwriting standards. About 60% of bank respondents say they tightened their lending standards on prime mortgages, while 75% reported tightening standards on nontraditional residential mortgage loans, according to the Federal Reserve's 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices.

High energy prices, a slowing economy, and low consumer confidence will restrain both new auto sales and credit union new auto lending in 2009. Credit union new auto loan balances declined 4.7% ($4.1 billion) in the first six months of 2008.

High energy prices will lower real wages and increase the financial stress on many households. Many members will finance current spending out of future income by relying more on credit card and home equity debt in 2009.

Lending opportunity

There will be opportunities to take on more loans in the current credit crunch, although the auto loan market will be soft. Don't tighten lending standards and be careful not to be bank-like. There are good credit borrowers out there, and credit unions can aggressively market to them.

With loan balances expected to grow slightly faster than savings at credit unions in 2009, the average loan-to-savings ratio will climb to over 84%, decreasing credit union surplus funds, but increasing credit union asset yields and improving the bottom line.

Credit quality will deteriorate in 2009. Falling home prices and the continuing mortgage credit crisis will spill over into the auto, credit card, student, and business lending sectors. Delinquency rates will rise to 1.25% in 2009, up from 1.08% in 2008. The largest increase will be concentrated in areas with the biggest housing price corrections. Moreover, loan seasoning and a weaker economy will increase net loan charge-offs and provisions for loan loss.

Credit union net income will be low into 2009. But remember not-for-profits only need enough net income to manage capital. Credit union return on assets will increase marginally to 0.7% in 2009, from 0.68% in 2008. Deteriorating credit quality will put some downward pressure on earnings, but the steeper yield curve should cause net interest margins to widen.

Capital-to-asset ratios will decline to 11% in 2009. Capital contributions will not keep pace with asset growth, lowering net worth ratios. The housing and credit crisis combined with an economy near recession will make for a challenging business environment for credit unions. A possible strategy is to just ride it out and allow capital to absorb this period of low earnings. Now is not the time to try to maintain earnings by raising loan rates and fees or cutting dividend rates. Now is the time to gain market share as banks tighten up their lending standards.

If your credit union has excess capital, you should develop a long-term strategy to use it. Have a serious conversation about capital, and then gradually manage to it. And remember, it's possible for a credit union to have too much capital.

Look for increased regulatory scrutiny of member business loans and due diligence from NCUA, and a general increase in regulation following the subprime crisis. Through these challenging times, there's an opportunity to tout the resiliency of the credit union movement.

And finally, be involved politically. It's during periods of financial stress when the worst regulations and legislation are passed.