Back on Track?
Expect modest growth and stronger earnings in the months ahead.
CUNA economists recently dusted off their crystal ball. The prognostications probably won’t shock you, but you might be pleasantly surprised.
The U.S. economy appears to be back on track, and should grow 2.5% in 2012 and 3% in 2013. Increasing job creation will continue to fuel the self-sustaining economic expansion during the next two years. But further household deleveraging (paying off debt) and government fiscal austerity scheduled for 2013 will be slight drags.
Inflation will remain near the Federal Reserve’s target of 2% in both 2012 and 2013. And core inflation (excluding food and energy prices) should stay at 2% for the next two years, due to weak wage pressure and low factory utilization. Low core inflation will keep inflation expectations and long-term interest rates low.
The unemployment rate will decline slowly during the next two years, as employers increase hiring faster than new entrants into the labor force. But the higher-than-normal unemployment rate will keep credit union delinquency rates above historical averages. Expect unemployment to average 8% in 2012 and 7.5% in 2013.
With weak labor markets, the federal-funds interest rate should stay low. But don’t be surprised to see a slight increase in 2013, if economic growth surprises on the upside. Labor and credit market conditions will be the major factors influencing the Fed’s decision to increase interest rates. But it will wait until loan demand increases and unemployment decreases before beginning its exit strategy from its extraordinarily easy monetary policy.
Bond market yields also are likely to increase, but only modestly. Economists have a poor track record of forecasting them during the past several years, but the fundamentals suggest the 10-year Treasury interest rate will average 2.15% in 2012 and 2.75% in 2013. Fed Chairman Ben Bernanke will keep his foot on the monetary accelerator to keep downward pressure on long-term interest rates through 2012. But they’re likely to climb above 3% by the end of 2013.
If so, the Treasury yield curve will steepen in 2012 and 2013, as long-term interest rates increase faster than short-term interest rates. This will increase credit unions’ net interest margins, as the practice of borrowing short term and lending long term becomes more lucrative.
Given these macro expectations, credit union savings balance growth should remain at 5% for the next two years. Despite rising disposable incomes, savings balance growth will remain below its five-year average of 6.4%, as members begin to spend again to relieve pent-up demand and they continue to deleverage. Currently, members are paying off debt rather than saving surplus funds, due to the large interest-rate differential between loan and deposit interest rates.
After three years of essentially no loan growth, credit union loan balances should increase 4% in 2012 and 6% in 2013. A stronger job market will boost consumer confidence and increase spending on autos, furniture, and appliances.
Auto loans, credit card loans, and purchase mortgages will be strong growth areas. Mortgage refinancing activity might be exhausted, but rising longer-term rates should entice first-time home buyers off the sidelines.
Credit quality will improve in 2012 and 2013. Overall loan delinquency and charge-off rates will fall as job growth accelerates. Provisions for loan losses as a percent of assets will fall to 0.4% in 2012—below the 0.43% recorded in 2007.
Overall, credit union return on assets will increase to 0.9% (after stabilization expense) in 2012 and 2013. Lower loan loss provisions will increase net income in 2012, as credit unions allow allowance for loan loss accounts to decline. NCUA assessments should equal nine basis points (bp) of insured shares in 2012 (an approximate 10 bp improvement over 2011) and loan growth should help boost asset yields, if only marginally.
Of course, modest growth and stronger earnings will mean capital-to-asset ratios will increase from 10% today to approximately 11% by year-end 2013. Credit union capital ratios will approach the record level of 11.5% set in 2006, the year before the start of the Great Recession.
MIKE SCHENK is CUNA’s vice president, economics and statistics. Contact him at 608-231-4228.