News of credit unions’ strong loan growth has spread far and wide in recent months.
The Wall Street Journal, for instance, reported on NCUA’s September announcement that federally insured credit unions’ year over- year loan growth hit 9.8% as of third quarter 2014—the highest level since 2006, and double banks’ 4.9% loan growth during the same period.
The article cited a Michigan psychologist as one example of someone who switched to a credit union because of his bank’s high fees and the credit union’s personalized service.
A second Journal article the same day touted the headline, “For a cheaper auto loan, try a credit union.” It also mentioned credit unions’ lower credit card and mortgage rates, and higher savings rates.
Heightened recognition that credit unions are a better all-around deal is one factor fueling the industry’s loan growth. And in 2015, loan growth will nudge up even higher to about 11%, according to estimates from CUNA’s economics and statistics department.
Other factors driving loan growth include the improving labor market, strong wage growth, recovering housing markets, improved consumer confidence, and pent-up demand for durable consumer goods, says Mike Schenk, vice president of CUNA’s economics and statistics department.
“Data from the Bureau of Economic Analysis shows that almost every durable good it tracks is now reflecting an average life that’s the highest in the past 50 years,” he says. “People have put off purchases of big-ticket items. That’s beginning to change. We see it in car sales, for example, which have rebounded strongly and will exceed 16 million units this year.”
Credit quality is improving, too. Credit unions’ average 60-day delinquency rate was 0.85% as of second-quarter 2014, down from 1.04% at the same time last year, according to NCUA data. Charge-offs also declined during this time, from 0.58% to 0.49%.
“We expect further improvement in those ratios,” Schenk says. “Loan growth increases the denominators of those ratios, which causes the overall ratios to decline.”
Also aiding the improved outlook is the Federal Reserve Board’s plan to “keep its foot on the accelerator” until labor markets are closer to full recovery, Schenk notes. The federal-funds rate, therefore, should stay near 0% until mid-2015, he predicts.
Looking down the road, managing interest-rate risk will be critical. Interest rates will rise, so credit unions’ liabilities will reprice quickly.
“We’ll have to pay depositors higher rates or risk losing them,” Schenk says.
Dividend expenses will outpace loan and investment yields, he adds. The longer the loan durations, the longer lenders must grapple with this issue.
“So credit unions need to be careful about the loans they add to their balance sheets,” Schenk says.
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