In March 2012, the credit union movement’s total assets reached $1 trillion for the first time in history.
With roughly 7,300 credit unions, average assets are $137 million. (But due to the large number of smaller credit unions, the median-size credit union has $19 million in assets.)
It’s tough to grasp the notion of $1 trillion. Try this mental exercise: Take the value of your home and add $1 trillion. That’s what $1 trillion equals. (The bar for economic humor is set quite low.)
This milestone is impressive, but to put it in perspective: Banking industry assets total more than $13.9 trillion. With roughly 7,360 banks, average bank assets are about $1.9 billion.
What else is valued at more than $1 trillion? Here are some examples:
► The total value of all goods and services produced in the U.S. last year—gross domestic product (GDP)—was more than $15 trillion;
► The U.S. federal budget deficit this year is projected to exceed $1.3 trillion;
► Total U.S. debt held by the public is more than $10 trillion;
► China’s holding of U.S. Treasury securities is slightly below $1.2 trillion; and
► The largest bank in the U.S.—JP Morgan Chase Bank—has assets of $1.8 trillion;
In finance, size matters. And size comes from growth. Credit union assets are expected grow 5% per year for the foreseeable future. According to the Rule of 72, dividing 72 by the annual growth rate calculates the number of years required for doubling. So credit union assets could reach $2 trillion in slightly more than 14 years.
But asset growth is limited by the growth in credit union capital. If credit unions want to maintain a given capital-to-assets ratio, say 10%, the asset growth rate can’t exceed the capital growth rate.
For credit unions, the financial ratio of return on equity (ROE)—net income divided by reserves and undivided earnings—is the growth rate of capital. So ROE is the asset growth “speed limit,” given a fixed capital-to-asset ratio.
The Great Recession of 2008-2009 reduced most credit unions’ ROE and therefore how fast their credit union assets could grow while maintaining their capital-to-asset ratios.
Fortunately, the economic recovery has improved loan quality at credit unions, lowering their provision for loan losses and boosting net income. Credit unions’ ROE ratios have experienced a nice turnaround during the past couple of years, allowing for faster asset growth.
During the past 20 years, U.S. nominal GDP growth averaged more than 4.7%, while credit union asset growth averaged 6.9%. This increased credit union assets as a percent of nominal GDP.
Strong asset growth also increased credit unions’ share of the household savings market. Twenty years ago, credit unions held 6.7% of household savings. Today, they hold 10%.
The news isn’t so rosy when it comes to credit. Credit unions’ share of the consumer loan market dropped from 11.1% in 1991 to 8.9% today.
There’s an old saying in finance that a financial institution with a growing deposit base will have higher earnings than one with a stagnant deposit base. For credit unions to thrive into the future, faster asset growth will be necessary in achieving greater economies of scale, higher earnings, and stronger ROE ratios.
And since stronger ROE allows for faster asset growth, we’ll have set in motion a self-reinforcing cycle.
STEVE RICK is CUNA’s senior economist. Contact him at 608-231-4285.