Diversification Key to Loan Growth in 2015
Interest rates, economic growth are two 'wildcards' that could affect CU lending.
Credit unions can expect continued strong loan growth in 2015 despite a few potential speed bumps that may surface along the way.
They detail factors that will affect credit union lending next year, share keys to lending success—and offer valuable advice about achieving strong loan growth in 2015.
Q What do you see for the overall CU lending outlook in 2015?
A This year has shown strong lending growth in the credit union industry, especially in key areas such as auto lending. Next year this growth should continue, but it’s important to recognize potential headwinds in a few key areas.
First is a possible rise in interest rates. An increasing number of analysts are anticipating that short-term rates could begin to rise in the second half of 2015 due to continued economic growth, rather than the previously held consensus view of 2016.
Second, we have already begun to see a slower growth rate of vehicle sales. This year, vehicle sales are growing by 5%, compared with double digit growth in 2010 through 2012 and 8% growth in 2013.
Finally, addressing new regulations while successfully growing loan and wallet share to increase revenue will be a real challenge. In 2015, new regulations that tend to inhibit healthy loan-based revenue streams will be in full force.
Q What factors will affect the CU lending outlook?
A Credit unions must take into account that the balance sheet of the average U.S. household is still not particularly healthy. For example, the debt-to-disposable income ratio still exceeds 100%.
While this is down from the high water mark of 130% in 2007, it is still far above the historical norms that were seen in the 1950s through the mid ‘80s of 60% to 70%. The implication is that consumers may continue to be cautious about taking on additional debt, which may temper growth.
Additionally, Raddon Financial Group research indicates that the acquisition of new vehicles could slow in 2015 among most consumer segments other than the highest income groups.
This suggests we may be moving into a more discretionary phase in regard to vehicle sales, following a period of catch-up seen since 2010.
In other words, the rapid increase in vehicle sales seen over the last several years reflected the release of pent-up demand. Future growth will be more discretionary in nature.
However, there is still a positive outlook for 2015. The U.S. economy overall is becoming healthier. This optimism could create more confidence in seeking a diverse variety of loans: mortgage, auto, business, home improvement, etc.
On the flip side, as the economy improves, interest rates will once again start to rise. Mortgage refinancing will begin to flatten out as a result. Hopefully this will be balanced by the boost in purchase loans.
Mortgage refinance volume in 2014 is about one-half of 2013 activity and one-third of 2012 activity. This decline is likely to continue, especially if we see further increases in long-term interest rates.
Additionally, due to changes to Qualified Mortgage standards, it may be more difficult for some members to qualify for even the most basic loan. Credit unions must be aware of these challenges for their members and factor it into their strategies and income roadmaps accordingly.
Q What are some keys to lending success next year?
A Diversification will be the key to loan growth in 2015.
In the last several years, credit union loan growth has been driven by vehicle loans. In 2015, successful credit unions will adopt a much more diversified growth strategy.
However, credit unions should not completely turn away from automotive lending. While all credit unions may prefer to originate only direct prime auto loans, delving into the indirect space with subprime auto loans could provide some significant income and loan growth.
Additionally, credit cards continue to present a major untapped opportunity for credit unions. Successful credit unions will offer a simpler, more transparent and higher value set of card products to their members.
Business lending will continue to be a major opportunity, and home equity lending should also be viewed as such, especially in markets that have seen real estate values return.
We tend to manage risk based on the last crisis—which in this case was the real estate crisis—and shy away from taking on that risk. But the reality is that real estate lending can present significant opportunities in selective markets to selective demographic groups.
Q What 'wildcard' factors could affect CU lending in 2015?
A Wildcards in 2015 are interest rates and economic growth. An increase in rates in 2015 could impact the demand for loans.
Also, if the economic recovery does not continue, we could see this impact the demand for credit.
Two other factors could impact lending: liquidity pressures returning at a much faster pace than anticipated, and student loan debt, which could present a crisis similar, albeit substantially smaller, to the real estate crisis of 2008.
Q What lending advice would you offer CUs?
A Credit unions need to use technology solutions to speed up and streamline the application and underwriting process. Appropriate origination solutions can free up employee resources to focus on new business and member service along with effectively cross selling other products and services to expand the member wallet share.
Technology also can aid in regulatory compliance. Origination solutions cannot replace the credit unions’ responsibility for regulatory compliance, but they can ensure lenders achieve that compliance efficiently and accurately in areas such as calculations, warranted state-specific documents, approved disclosures, and workflow enforcement.
Servicing technology can also contribute to regulatory compliance with confidential data management, client notifications, and accurate accounting.