LAS VEGAS–How will the second half of 2016 play out, and what might 2017 look like from an economic point of view?
In remarks to the Catalyst Corporate Accelerating Success Conference, Steven Rick, chief economist for CUNA Mutual, offered these predictions:
- Credit union savings balances will grow by 5% in 2016 and 4% in 2017. As the Federal Reserve continues raising short-term interest rates this year, expect the anticipated transfer of funds to money market mutual funds to finally materialize. With inflation in the offing and the windfall from lower oil prices disappearing, cautiously optimistic members will seek higher returns.
- Membership growth will continue to increase in 2016 by 3% due to more indirect auto lending and spreading word of the positive credit union value proposition. Expect membership growth next year (2017) to be slightly lower, at 2.75%, as the auto lending boom begins to slow and indirect borrower memberships decline.
- Credit union loan balances will increase by 10% in 2016 and 9% in 2017. Loan growth this year will be only marginally lower than the impressive loan growth of last year. As the economy continues to expand, expect households to continue to release pent-up demand for autos, furniture and appliances throughout 2016, and at a slightly slower pace in 2017. New auto loans, credit card loans and purchase mortgage loans will remain strong growth areas.
- Credit quality will remain healthy in 2016 and 2017. The improving job market will contain the numerators of the loan quality ratios, and fast loan growth will expand the denominator. This will push the delinquency ratio down from 0.81% in 2015 to 0.75% in 2016 and 2017. Net charge-offs will likewise decline from 0.48% in 2015 to 0.45% in 2016 and 2017, respectively.
- Credit union return on assets will decline marginally to 0.70% in 2016 and could dip to 0.65% in 2017. Interest margins will be helped by strong loan growth in 2016, but hurt by the flattening yield curve, according to Rick. Mortgage refinancing and its resulting revenue will decline in 2016. The effect of overfunded loan loss allowance accounts, which kept loan loss provision expenses very low for the past few years, will dissipate in 2016. Higher funding costs, higher operating expenses due to a tighter labor market, and lower fee income from overdrafts and insufficient funds (NSFs) will also contribute to lower return on assets in 2016 and 2017.
- Net worth ratios will increase to 11% in 2016 and 11.2% in 2017. Even with the expected slight decline in earnings, capital ratios will continue to rise this year and next, as soft savings inflows provide for only modest asset growth.