Improvements in members’ ability and willingness to borrow will almost certainly fuel credit union loan growth into 2016. But where will growth likely occur?
Mortgages, auto loans, and member business lending are likely to be the most promising areas of growth.
At midyear 2015, first mortgages accounted for 41% of total credit union loans outstanding, making it the largest (by far) of the seven key portfolios CUNA tracks.
Credit union first mortgages outstanding increased 8.7% in 2013, 9.1% in 2014, and 9.6% in the year ending June 2015.
The Mortgage Bankers Association’s (MBA) newly minted mortgage market forecast reflects expectations of a 26% increase in purchase originations in 2015 and an 11% increase in 2016.
But refinancings are expected to increase 22% in 2015, and then decline 35% in 2016 (due in large part to their expectation of a 70 basis point [bp] increase in the 10-year Treasury yields during the period).
All else equal, the 35% decline in mortgage refinance business would have bottom-line effects, reducing credit union “gain on sale” income and mortgage origination fees.
But the 11% increase in purchase volume would offset part of this loss as more first-time borrowers enter the market.
Overall, the MBA expects originations to increase 24% this year and decline 9% in 2016. The path for credit unions might be slightly different.
It’s important to note that the credit union first mortgage origination market share steadily increased each year since the beginning of the financial crisis.
The credit union share in 2007 was 2.6%. But that has more than tripled, growing to 8.6% in the first half of 2015.
That momentum is likely to continue, especially if membership growth continues to outpace population growth.
Recent history suggests that even though aggregate origination volume may be falling, credit unions should fare better than their competitors in the for-profit sector.
For 2016, credit union first mortgage growth in the 8.5% to 9.5% range seems most likely.
Used-auto loans accounted for 20% of total credit union loans outstanding. Momentum has been building during the past few years, and credit union used-auto loans outstanding increased quickly.
Overall balances grew 10.5% in 2013, 12.9% in 2014, and 13% in the year ending June 2015.
As in the mortgage arena, credit unions seem to be grabbing a disproportionate share of overall activity.
Used-car sales are up 5.1% in the year ending June 2015, according to recent data from Edmunds. That’s less than half the credit union increase during the same period.
CNW Marketing Research estimates the used-car industry will top 41 million units annually into the foreseeable future with 2016 hitting a peak of 43.5 million sales.
Credit unions’ favorable pricing will continue to fuel relatively strong loan growth in the coming year.
The average interest rate on credit union four-year used-auto loans is 2.8%. That’s 1.34 percentage points below the 4.14% bank average, according to Informa Research Services [http://www.informars.com/main/default.aspx], a CUNA Strategic Services alliance provider.
On a $20,000 loan, that difference translates into a savings of nearly $12 per month, $144 per year, or about $720 during the life of the four-year loan.
Credit union used-auto loan growth seems likely to settle into a range between 12% and 13% in 2016.
At midyear 2015, new-auto loans accounted for 12% of total credit union loans outstanding.
Credit union new-auto loans outstanding grew 12.7% in 2013, 20.9% in 2014, and 19.6% in the year ending June 2015.
Nationally, sales of cars and light trucks increased 7.5% in 2013, 5.8% in 2014, and 2.2% in the year ending June 2015.
The National Automobile Dealers Association (NADA) expects sales of 17.2 million units in 2015 and 17.6 million units in 2016. If achieved, those results would translate into percentage increases of 4.7% and 2.3% in 2015 and 2016, respectively.
Demand will increase due to the combination of more consumers looking to replace old vehicles and more wealth-effect spending fueled by lofty equity prices and continuing improvement in home prices.
Rising consumer confidence and more income growth in the coming months also will bolster the auto market.
Favorable pricing will help credit unions, too. The average interest rate on credit union five-year new-auto loans is 2.57%, 1.31 percentage points below the 3.88% bank average, according to Informa.
On a new $30,000 loan, that difference translates into a savings of nearly $18 per month, $210 per year, or $1,100 during the life of the five-year loan.
Given this backdrop, an increase in credit union new-auto loan growth of 12% to 13% seems reasonable during the coming year.
Member business loans
Credit union member business loans (MBLs) accounted for roughly 7% of total credit union loans outstanding, as of midyear 2015.
Credit union member business loans outstanding increased 10% in 2013, 12.4% in 2014, and 11.3% in the year ending June 2015.
Credit union business lending has outpaced bank business lending by a wide margin for nearly a decade. Don’t expect that to change.
While banks are pricing more aggressively, credit unions offer more underwriting flexibility and the local decision making and high-touch service that most small businesses look for when in the market for loans.
Recent NCUA technical changes to the definition of MBLs, especially the treatment of participations, will mean that some of the loans historically characterized as MBLs will be viewed differently in the future.
While that may slow the recent growth in MBLs, it’s a function of the “accounting” (loosely speaking). The economics will tell a different story.
Movementwide, MBL growth will be healthy and, absent definitional/categorical changes, these balances should increase 10.5% to 11.5% in 2016.
At midyear 2015, credit cards accounted for 6.1% of total credit union loans.
Dollar balances in credit union credit card accounts increased 7.7% in 2013, 7% in 2014, and 6.8% in the year ending June 2015.
In the aggregate, credit union credit card balances seem on track to expand 5.5% to 6.5% in 2016. As is the case in the auto arena, pricing will drive relatively strong gains in credit union portfolios.
Informa data reflects a 366 bp rate differential on reward cards at credit unions versus banks. The average credit union interest rate is 10.34%, compared with 14% at banks.
Moreover, the average annual fee for credit union credit cards (among those that charge such a fee) is $43.75. That’s nearly $54 lower than the bank average fee.
Also, the average maximum late fee on credit union cards is $23.62, $11.16 lower than the $34.78 bank average.
Whatever your credit union’s size, it’s a fair bet that 2016 loan growth will be relatively strong. And the increases will continue in nearly every key segment of your portfolio.
MIKE SCHENK is CUNA’s vice president of economics and statistics. Contact him at 608-231-4228.