Credit Union Forecast for 2010

CUNA senior economist
December 3, 2009 | COMMENTS

Credit union savings growth will peak in 2009 at 12%. Credit union members' job-loss fears have altered their spending and savings behavior. The savings rate (personal savings-to-disposable personal income) will rise to over 7% in 2010. The growth in credit union savings balance will slow to 8% in 2010 as the economy recovers, layoffs abate, home prices stabilize and stock prices move higher. Credit unions with rapid deposit growth will grow and be able to take advantage of new loan growth.

The collapse of the shadow banking system has led to a flight to traditional banking (taking deposits, making loans). As banks restructure their funding profile, this could increase competition for deposits among all depository institutions. Money market mutual funds will be less of a competitor in the future as they buy less risky investment products and therefore earn lower returns.

Credit union loan growth will fall to 4% in 2009. Credit union members have little appetite for additional debt in 2009 and are embarking on an effort to reduce their leverage (debt-to-net worth) ratios. Loan growth will rise to 7% in 2010, but below its recent 5-year average of 8.5%. Failing and financially constrained banks will decrease competition in many markets, creating market share and pricing opportunities.

One lesson credit unions have learned during the credit crisis is that it's important to maintain a consistent credit culture. This means not loosening your loan underwriting standards in good times and tightening in bad. This may mean you lose some borrowers when the economy is robust, but you pick them up when the economy slows and other lenders are pulling back. However, the adverse selection problem is on the rise for credit unions as high-risk borrowers are being denied credit at banks.

The big question facing many credit unions is whether recent rapid credit union mortgage portfolio growth has set credit union up for falling earnings in the future if inflation and interest rates head back up? This interest rate risk was one of the major factors that helped decimate much of the savings and loan industry a generation ago.

Credit quality will improve slightly in 2010. Improving labor and housing markets will reverse the recent deterioration in credit quality. Overall loan delinquency rates will fall from 1.65% in 2009 to 1.5% in 2010. Net charge-offs will fall from 1.19% to 1%, lowering provisions for loan losses.

Credit union return on assets will recover to 0.5% in 2010. Improving credit quality, rising net interest margins and cost containment efforts will boost earnings from the historic low of 0.13% set in 2009. But credit unions will find it harder to generate the kind of earnings our movement got accustomed to over the last 20 years. Changing consumer behavior (deleveraging and increased savings) will provide opportunities and challenges for credit unions in 2010. The biggest challenge will be placing the flood of new deposits into high yielding loans instead of low-yielding investments.

The credit union model of financial institution ownership has shown great strengths during the current financial crisis: not obsessed with short-term growth, can live with periods of reduced earnings, more reliant on stable deposits. Credit unions should not however, minimize the scale of the changes sweeping over the financial institution industry and should begin planning for the “new normal.” Probably the biggest change going forward is that credit unions will be operating with a heightened awareness of risk. And that's always a good thing.