Credit unions can expect loans outstanding to grow 3% during 2012, fueled by an improving economy and resulting job growth, and rising consumer confidence, says Steve Rick, CUNA’s senior economist.
Rick foresees no loan growth for 2011. Through November (the latest information available), credit union loan growth totaled only 0.6%.
Other factors indicating a rosier lending outlook:
• Pent-up demand for durable goods due to falling consumer spending from 2009 to 2011. This will aid growth in auto loans, credit cards, and purchase money mortgages.
“Auto loans will go up because people will start buying cars again, and credit cards will go up because people will start buying appliances and furniture,” Rick says.
Plus, he says home prices should bottom out, which will encourage consumers to re-enter the housing market.
On the flip side, home equity loans outstanding, which fell 3% from September 2010 to September 2011, will continue to decline as consumers pay down debt. “One debt they’re paying off is home equity loans,” Rick says. “Expect that to continue in 2012.”
• Households have accelerated loan payments and payoffs, which has reduced consumer loan balances.
• Rising stock prices will produce a “wealth effect,” which will increase consumption. But stock market volatility could eliminate this effect, he warns.
• Rising auto sales may quell captive finance companies’ below-market financing offers.
• Prospects for passage of the Small Business Lending Enhancement Act, which would raise credit unions’ business lending cap from 12.25% to 27.5% of assets.
Rick highlights a new issue facing lenders: How to serve the newly credit impaired.
“The Great Recession created a large pool of borrowers with subprime credit scores,” he explains. “Maybe they were unemployed for six months and missed a mortgage payment—and now have a 600 credit score. We need to decide how to serve them. How do we adjust our underwriting standards? Do we implement risk-based lending?”
Rick expects forward progress on the credit quality front, predicting delinquency to fall from 1.5% to 1.2% from 2011 to 2012, and charge-offs to drop from 0.9% to 0.85 during this period.
“That’s the good news,” he says. “The bad news is that these measures remain above historical averages.”
From 1990 to 2007, credit unions typically charged off 50 cents for every $100 in loans, Rick explains. In 2009, that jumped to $1.21, before falling to 90 cents in 2011.
Average return on assets (ROA) should also improve, namely due to dramatic declines in provisions for loan loss as charge-offs have fallen.
Rick does cite certain “wild card” factors that could affect credit unions’ lending: