Net Income Will Gain Momentum
Net income should be 60 bp of average assets this year and 70 bp next year.
You might be surprised by CUNA’s economic forecasts for 2011 and 2012. CUNA’s economists recently updated them at cuna.org.
Net income, for example, should be 60 basis points (bp) of average assets this year and 70 bp next year. That’s not quite the 90 bp to 100 bp that credit unions often seek and became accustomed to for 25 years until the middle of the last decade. But it’s a lot better than the almost nonexistent net income of 2008 and 2009, and the mere 40 bp of last year.
The primary driver of improving net income will be a substantial reduction in the provision for loan and lease loss (PLLL) expense. Of all the forces that hit net income during the Great Recession, it was the increase in PLLL from around 35 bp of assets for most of the past decade to 90 bp in 2008 and 110 bp in 2009 that did most of the damage.
Had PLLL expenses been “normal” in 2009, credit union net income would have been about 95 bp, instead of only 18 bp. Last year, PLLL fell to around 80 bp, and this year we expect it to be below 50 bp. This doesn’t mean credit unions won’t experience considerable loan losses, but most have built allowance accounts that are more than adequate to cover losses. They don’t need to be rebuilt, and will require little additional PLLL.
Some might say we’re ignoring tremendous threats to interchange income, which could decline substantially once the Federal Reserve’s proposed rule on debit interchange takes effect in July. Believe me, as consumed as we’ve been with the interchange issue these last few months, there’s no way we could ignore it. At press time, however, we’re still working and hoping for a delay in the rule’s implementation. Even if it takes effect in July, the early effects on credit union net income will likely be slight.
There’s a major concern that the “carve out” for credit unions with less than $10 billion in assets won’t be effective. That concern is well-founded. But most likely it will take a few years for interchange rates for smaller institutions to converge on the regulated fees for larger ones—a serious problem after 2012, but likely not until then.
Many credit unions are still concerned about NCUA assessments for the National Credit Union Share Insurance Fund (NCUSIF) and corporate stabilization. CUNA recently revised its forecast for NCUSIF premiums this year and next year to zero. Yes, zero.
NCUSIF has built up a large reserve for insurance losses during the past three years (as the condition of credit unions deteriorated) and credit unions have since stabilized and begun to recover. These are still tough times for credit unions, and some will fail in the next two years, but insurance losses most likely have already been paid for.
That leaves corporate stabilization assessments. Under NCUA’s stabilization fund, about $8 billion is to be paid over 11 years—an average of $750 million a year. That would be about 9 bp of insured shares this year.
For cash flow reasons, however, this year’s assessment likely will total about $2 billion, or 19 bp of insured shares. That’s not because of any increase in total loss estimates, and it would leave $6 billion to be paid over the remaining 10 years of the Fund. (Click here for a more detailed description of expected NCUA assessments.)
Net interest income for most credit unions should drift up during the next few years. Loan growth, although modest, will at least be positive. And yields on short-term investments will start increasing late this year. With most financial institutions still flush with cash, interest rates on consumer deposits should lag increases in short-term market interest rates.
That’s our story, and we’re sticking to it.
BILL HAMPEL is CUNA’s senior vice president of research and policy analysis/chief economist. Contact him at 202-508-6760.