Credit union loans, savings up in May

Savings growth outpaced loan growth at credit unions in May, leading the credit union movement's aggregate loan-to-savings ratio to fall to 67.7% from 68% in April, according to the Credit Union National Association's (CUNA) Monthly Credit Union Estimates.

Credit union loans grew by 0.5% in May--a 6% annualized rate.  Savings growth outpaced loan growth by a wide margin--though the disparity arose because May ended on a pay day and automatic payroll deposits caused share draft balances to increase dramatically. Savings balances increased by 9% in the month.

"The combination of a slowly improving economy, significant pent-up demand, and seasonally strong borrowing should result in relatively strong loan growth in the coming months," said Mike Schenk, vice president of CUNA's economics and statistics department. "All else equal, this should have a positive influence on credit union bottom-line results as short-term, liquid investments yielding close to zero are replaced with higher-yielding assets."

May's asset quality improved marginally, with dollar delinquencies ending at 1.14%, which compares to 1.17% at the end of April.  The movement's aggregate delinquency rate has remained in the 1.20% to 1.14% range for the past year, though it is substantially improved compared to the year-end 2011 reading of 1.6% and the 1.85% cyclical high recorded in January  2010.  The movement's long-run average aggregate delinquency rate is about 1%.

CUNA economists continue to stress the likelihood of slow improvement in economic conditions, with a continuation of slow labor market improvement, marginal income gains, and more loan growth.  "This suggests that the improving asset quality trends we've seen will continue in the coming months," Schenk told News Now.  "More important, the improvements are likely to push the aggregate delinquency rate back down near the 1% long-run norm in 2013."

Total memberships expanded rapidly--by 0.5% (an annualized 5.5% rate)--during May. "That rate of growth will obviously not be sustained throughout the year, but the data do show credit union memberships are up by 2.5%, compared to year-ago levels and are up 1.5% on a year-to-date basis," Schenk said. "By way of comparison, the U.S. population grows at an annual rate of slightly less than 1%--a clear indication that more consumers continue to recognize the credit union difference and understand that credit unions are the best choice for consumer financial services."

From an economic perspective, the U.S. economy continues its slow, unsteady recovery, said CUNA economists.  Further improvement has lately been constrained by big declines in government spending and investment, Federal Reserve policymakers that seem to be sending mixed signals on the potential for quantitative easing (QE3) "calibration" and more cracks evident in overseas economies--particularly in China.

Nevertheless, consumers are engaged.  Personal consumption activity has been fueling economic growth and (by extension) labor market improvement.  With the federal funds interest rate expected to remain low through 2014, a robust housing market recovery (with big upside potential) and consumer confidence at its highest level since January 2008, more improvement -- both in the economy and in credit union operating results -- is expected in the coming months, CUNA economists said.

"Looking forward, these macro-developments should translate to marginally faster loan growth, further improvement in asset quality, and higher capital cushions at U.S. credit unions in the coming months."

CUNA economists said they expect:

  • Credit union savings balances to grow 6% in 2013 and 5% in 2014.Saving growth will remain below the average growth rate over the last 20 years of 6.7% as the economic recovery encourages more households to spend rather than save.  Fast membership growth of approximately 2% (twice as fast as the 1% growth in population) will help buoy savings growth.
  • Credit union loan balances to rise 5.5% in 2013 and 6.5% in 2014."We expect households to release some pent-up demand for autos, furniture, and appliances over the next two years.  New auto loans, credit card loans and purchase mortgage loans will be strong growth areas," said Schenk.
  • Credit quality will improve in 2013 and 2014. The overall loan delinquency rate will fall below 1% in 2013, the lowest level since July 2008, as job growth continues.  Provisions for loan losses as a percent of assets will fall to 0.30 percent in 2013, below the 0.43% recorded in 2007.
  • Credit union return on assets will fall to 0.75% in 2013 and 2014.  A 10 basis point (bp) decline in net interest margins will be only partially offset by a five bps decline in provisions for loan losses.  Fee and other income will decline as the mortgage refinance boom comes to an end in 2013.
  • Capital-to-asset ratios will rise to 10.9% in 2014. Capital growth will outpace asset growth over the next two years, increasing the capital-to-asset ratio.  Credit union capital ratios will approach the record level of 11.5% set in 2006, the year before the beginning of the great recession.