As vaccinations become more widely available, people will begin to leave their homes, travel, and spend money as interest rates remain low. At the same time, the unemployment rate is beginning to recover as more jobs come back into the economy.
“I don’t know if I would call that a rosy forecast, but it’s certainly rosier than we’ve previously published, at least from an economic perspective,” says Mike Schenk, CUNA’s deputy chief advocacy officer and chief economist. “And that’s pretty good news overall.”
During a breakout session at the 2021 CUNA Governmental Affairs Conference, Schenk notes five certainties credit unions will experience in 2021:
1. Savings growth will dominate. As in 2020, CUNA economists forecast savings growth to continue at significant levels. They’re calling for 15% savings growth in 2021, in part due to $900 billion in additional pandemic-related support spending at the federal level and the promise of an additional $2 trillion, which will lead to significant deposit growth. “Double-digit growth of this magnitude has not been seen in credit union land since 1994,” Schenk says.
At the same time, he expects loan growth to remain around 5% in 2021.
2. Loan-to-share ratios will decline. With strong savings growth and relatively weak loan growth, loan-to-share ratios are projected to fall to 69% in 2021, Schenk says. That’s a big decline from 84% at the start of 2020 and it will have significant implications on credit unions earnings, primarily due to fast investment portfolio growth, which will focus on short-term investments with rates close to zero. This will also have an impact on net interest margins and the yield curve.
3. Capital erosion will continue. In December 2019, the capital ratio was near an all-time high of 11.2%, Schenk says. With the massive influx of deposits, that ratio has been slowly eroding and CUNA economists forecast it will reach 9.4% in 2021. If that occurs, it will put the net ratio roughly equal to that experienced in the depths of the Great Depression.
4. Members will pay their bills on time. Stimulus payments have allowed consumers and small businesses to continue to pay their bills on time despite the challenges they’ve faced during the pandemic. Delinquency rates were 0.7% in December 2019 and improved to 0.57% by mid-2020. Economists forecast delinquency rates will reach 0.8% in 2021 before falling back to 0.7% in 2022. These are relatively modest readings compared to previous downturns and economic disruption.
5. Earnings challenges will be magnified. In 2019, the median return on average assets (ROA) was 59 basis points, which declined to 42 basis points in the third quarter of 2020, Schenk says. But he notes there was a wide distribution in ROA across credit union asset size categories, ranging from 22 basis points for credit unions with less than $7.5 million in assets to 57 basis points for a credit union with more than $250 million in assets.
“There is some real obvious pain and real obvious challenges, especially in the nation’s smallest institutions,” he says. Economists forecast the ROA for a typical credit union to be close to 30 basis points in 2021.
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