How to Navigate 2013
Growth opportunities will be scarce, but challenges will be abundant.
As we prepare to turn the page on 2012 and open the book on 2013, we asked experts in four critical areas—the economy, legislation and regulation, consumer awareness, and lending—how credit unions should navigate the twists and turns they’ll inevitably confront down the road in 2013.
Not everyone sees economic gloom and doom on the horizon. “We’re forecasting 3.5% growth in gross domestic product compared with the 1.7% we had as of the second quarter of 2012,” says Steve Rick, CUNA’s senior economist. Potential positives include acceleration in new home sales, increased fuel supplies, and growth in health-care spending and new car purchases.
“People haven’t been confident making major purchases during the past few years,” Rick says. “We anticipate that pent-up demand will translate into 5% overall loan growth in 2013.”
The biggest lending opportunities likely will be in vehicle loans, credit cards, and mortgages.
Of course, there’s no guarantee of an uptick. “The big concern is that we’ll have a double-dip recession caused by tax increases,” Rick warns. “Tax cuts are expiring and what happens next in this area will be critical. We also have to worry about the impact the Eurozone debt crisis could have in the U.S.”
Banks’ resurgence will also have an impact. “Banks have recapitalized, and their earnings are up to near pre-recession levels,” Rick says. “During the credit crunch, banks typically were interested only in consumers who could make big down payments and had stellar credit ratings. Now, banks are going after a wider range of loans, and they’re becoming a bigger concern as competitors.”
Another ongoing concern is capital constraints. “Imagine that your business has the infrastructure to handle 20% growth and the opportunity to do so, but you can’t access the capital,” says John Gregoire, president of the ProCon Group. “Right now, our reserve levels have to be the same for cash as they are for the riskiest instruments in our portfolios. There’s no sophistication in how we assess our capital needs.”
Plus, most credit unions don’t have access to secondary capital.
To navigate the twists and turns of 2013, Rick and Gregoire suggest:
NEXT: Legislation and regulation
Legislation and regulation
Three top challenges on the legislative and regulatory fronts are the deficit, tax reform, and regulatory relief, say CUNA’s Ryan Donovan, senior vice president, legislative affairs, and Mary Dunn, senior vice president, regulatory advocacy, and deputy general counsel.
“Anytime Congress has todeal with taxes, credit unions’ tax status is threatened,” Donovan says. “Regardless of who was elected, that will be an issue.”
And don’t expect credit unions’ continuing compliance burden to go away in 2013, Dunn adds. The broad mandate Congress gave the Consumer Financial Protection Bureau (CFPB) means there’s almost nothing it can’t examine more closely—adding to credit unions’ increasingly heavy regulatory burden.
“We need to find ways to get the CFPB to stick closer to the tasks assigned by Congress and for Congress to be aware of the consequences of its requirements,” Dunn says.
Fortunately, she believes CFPB Director Richard Cordray sincerely appreciates the value credit unions provide. “Congress has given him a set of marching orders that he’s obligated to meet, but I believe he’s trying to minimize the burden on credit unions, and we need to leverage that as much as we can.”
Donovan believes the regulatory pendulum is starting to swing back the other way, especially for smaller financial institutions. “Congress is aware that if regulation is too stringent, credit and services will be choked off.”
The best ways to make progress on the legislative/regulatory front, the experts say, are to:
NEXT: Consumer Awareness
The rosy glow that came with gaining roughly 650,000 new accounts and $4.5 billion in deposits in the months leading up to Bank Transfer Day (Nov. 5, 2011) continued as credit unions added 2.2 million net new memberships during the 12 months ended June 2012, CUNA reports (“CUs see fastest new-member growth in a decade,” p. 22).
How can credit unions keep the momentum going in 2013? Here are some strategies from Mark Arnold, president of On The Mark Strategies:
An improving economy could put loan growth in the 5% range in 2013, up from about 4% in 2012, CUNA’s economics and statistics department reports. Leading loan growth next year
2. 2011-2012 Survey of Potential Members, enter 29901 in the search box.
likely will be first mortgages and auto loans, says Mike Long, executive vice president/chief credit officer at $1.6 billion asset UW Credit Union, Madison, Wis.
“During the recession, people put off vehicle purchases and there’s a lot of pent-up demand,” Long says.
Credit card originations should also improve as credit unions offer more of the card features members want. “In the past there was a greater focus on rates,” Long says. “But members who treat their credit card like a debit card—and pay off the balance each month—are more interested in the rewards programs.”
Credit quality also is on the upswing. Long reports an 18-year low on delinquencies but cautions that credit unions must be careful to maintain their underwriting standards as loan competition increases.
Nationally, CUNA projects overall loan delinquencies will fall from 1.26% at year-end 2012 to 0.90% in 2013, and charge-offs will decline from 0.73% to 0.65%.
Loan income, however, isn’t likely to rebound strongly. CUNA predicts credit unions’ return on average assets will fall from 0.8% at year-end 2012 to 0.7% in 2013.
“The number of loans is growing but the margins are so compressed that the spread between loans and deposits is razor thin,” Long says.
To succeed in the lending arena, credit unions should heed Long’s advice:
“We review the member’s credit bureau report and pinpoint ways that we could save them money,” Long says. “We’ve recaptured a lot of loans this way and helped our members, too.”