Strong consumer household financials and a continued upward trend in the economy at large has created a golden opportunity for credit unions to grow their lending portfolio, CUNA Chief Policy Officer Bill Hampel says.
“And the good thing about loan growth now is that it’s more balanced than during the mortgage spike after the recession,” Hampel says. “It’s more diversified.”
The household sector--which represents 70% of U.S. gross domestic product--”is in really good shape right now,” according to Hampel, who noted:
The situation could improve even more if Hampel’s prediction that millennials’ prime borrowing window has merely been delayed due to the macroeconomic limitations on that generation, rather than missed entirely.
There’s just one catch, related to lingering consumer wariness nearly a decade after the start of the financial crisis: Credit unions must pay close attention to pricing, setting longer terms with lower monthly costs.
“Consumers aren't quite ready to pull trigger and roll back to typical American profligate spending, because the recession was searing--it really had a significant effect and burnt in our memories,” Hampel says. “We’re still being a little bit cautious.”
That’s particularly true when it comes to mortgages, Hampel notes, which means credit unions will have to work harder in this sector to increase market share. Also, he expects refinance revenue to “be nonexistent after the next few months.”
“This has got to be the last refinance spike,” Hampel adds. “From now on, you might see boomlets--it won’t be a case of everybody trying to refinance, as happened five times in the last 20 years. You have to be willing to chase these loans, work with Realtors, and get into the purchase mortgage market.”
Expect debit interchange revenue and overdraft revenue to also fall in coming years, according to Hampel.
On the positive side, credit unions will benefit from lower loan loss provision expenses, and will wind down contributions to the Corporate Stabilization Fund. In fact, credit unions can expect a refund in 2021 because the corporate credit union losses weren’t as severe as first expected and NCUA recovered more than $4.3 billion in losses through lawsuits against parties that sold faulty mortgage-backed securities to corporate credit unions.
Hampel forecasts the industry-wide 80 basis points earnings average to fall to 70 basis points. “But asset growth is strong enough to maintain current capital ratios,” he says.
Delving further into that topic, Hampel asks aloud, “Is 80 the new 100?”
“Credit unions’ goal now should be 80 basis points because of much lower inflation,” he says. “To maintain a net worth ratio of 11%, with 8% asset growth, requires 80 basis points of return on assets.”
With less nominal growth, you need less return on assets, Hampel explains. Rising prices lower the value of existing financial assets.
Expect slower growth over the next 10 to 20 years because of low inflation--but focus on the inflation-adjusted growth rate, Hampel emphasizes.
“I’m not saying you should be satisfied with subpar growth,” he adds, “but unless inflation really spikes, don’t fret smaller growth.”