MADISON, Wis.—CU loan balances were up slightly in October, while membership gains slowed, according to CUNA Mutual Group’s latest Trends Report.
CUNA Mutual is forecasting auto sales will decline next year, with a resulting slowdown in lending growth in what has been a strong category for CUs. The company's economists also predict higher Fed Funds rates will have a slight downward pull on overall loan growth next year as credit card, auto and mortgage interest rates increase.
“We expect loan growth to slow to 8% in 2019 from 10% in 2018; however, this is still above the long run average of 7.8%,” CUNA Mutual Group said.
The surging membership growth the CU community has seen this year should slow as well in 2019, the company said.
CUNA Mutual reported credit union loan balances rose 0.7% in October, faster than the 0.6% pace reported in October 2017. Driving overall loan growth was strong growth in second mortgages (3%), home equity loans (2.4%), adjustable rate first mortgages (2%) and unsecured personal loans (1.2%).
Here's a look at how credit unions performed by category through October.
Credit Union Consumer Installment Credit (CUCIC)
Credit union consumer installment credit balances (auto, credit card and other unsecured loans) rose 1.5% in October, faster than the -0.6% pace set in October 2017, due to an acceleration in unsecured personal and credit card lending. During the last 12 months, credit union consumer installment credit grew 10.3%, which is more than twice as fast as the rest of the market. For all lenders, outstanding consumer credit rose a whopping $25.4 billion in October, according to the Federal Reserve, and above the $15 billion average monthly growth reported during the last 12 months. The rise in the Fed Funds interest rate will increase credit card interest rates in the near term and, to a lesser extent, auto loan rates. This will boost credit union yield on assets and net income in 2019, the report stated.
Vehicle Loans
Credit union new auto loan balances rose 0.7% in October, slower than the 1% pace set in October 2017, and increased 11.5% during the last year. On a seasonally-adjusted annualized basis, new auto loan balances rose 8% in October, down from the 11.6% pace reported in October 2017. “Strong consumer fundamentals are driving auto loan growth: a strong labor market, low interest rates, rising wage growth, expanding driving-age population, improving construction activity, low oil prices and better household balance sheets. The number of new auto loans as a percent of members in offering credit unions – the penetration rate – rose to 6.1%, up from 5.7% last year and 4.2% in 2012,” CUNA Mutual Group said.
Vehicle sales rose to 17.5 million units in October, on a seasonally-adjusted annualized sales rate, from the 17.4 million reported in September. “October was the strongest sales month of 2018 so far. Expect new auto sales to slow in 2019 due to rising interest rates, a price correction in the equity markets and record levels of off-lease vehicles hitting the market. This will slow credit union new-auto lending growth to the 8-9% pace in 2019, down from 11.5% today,” the company said.
Real Estate Secured Lending – First Mortgages and Other Real Estate
Credit union real estate lending was firing on all four cylinders during the first 10 months of 2017 due to the improving economy and credit unions increasing their market share of the mortgage origination market. Adjustable-rate first mortgage loan balances grew a strong 2% in October, similar to the 1.8% pace set in October 2017. Second mortgage loan balances rose 3% in October, above the 1.9% increase recorded in October 2017. Expect purchase mortgage lending to increase around 3-4% in 2019 due to rising incomes, higher consumer confidence and strong job growth. However, expect refinance mortgage lending to drop 25-30% as long-term interest rates rise from around 4.75% today for a 30-year mortgage to 5.25% in 2019. Thus, total mortgage lending is expected to decline by 4-6% in 2019, the report stated.
Home equity lending balances surged in October, rising 2.4%, similar to the 2.1% reported in October 2017. Seasonal factors typically add 0.6 percentage points to the underlying monthly trend growth rate in October, making it the second fastest growing month for home equity loans. Home equity loan balances will remain strong due to rising home prices, the strong job market, high consumer confidence, consumers releasing pent up demand for durable goods and low interest rates, CUNA Mutual said.
The contract interest rate on a 30-year fixed-rate conventional home mortgage rose to 3.83% in October, from 4.63% in September, and above the 3.9% reported in October 2017. Mortgage interest rates rose due to a 22 basis point jump in the 10-year Treasury interest rate. Of the 22 basis point increase in long-term interest rates, 19 basis points were due to a tightening in the capital markets and 3 basis points were due to an increase in inflation expectations.
Home prices rose 0.5% in October from September, according to the Core Logic Home Price Index, and 5.4% year-over-year. Year-over-year growth is hovering around the slowest pace in nearly two years. The housing market is tight, with the inventory-to-sales ratio still at a cyclical low, which spurs house price gains. Demand for homes is rising steadily, but it is the limited supply of inventories that is boosting prices, the company said.
Surplus Funds (Cash + Investments)
Credit union surplus funds fell in October by $8.5 billion due to a $7.7 billion surge in loan growth and $1.6 billion drop in deposits. Borrowing rose $4.7 billion to help fund loans and deposit runoff. Credit union surplus funds as a percent of assets fell to 23.5% in October from 24.1% in September to reach $345.4 billion. This is the lowest credit union liquidity position since early 1980.
As the Federal Reserve raised the Fed Funds interest rate 1% over the last 12 months the yield curve has flattened, as measured by the difference between the 3-year Treasury interest rate and the Fed Funds interest rate. Flatter yield curves historically induce credit unions to reduce the percent of surplus funds invested with maturities greater than one year. With the Federal Reserve now paying 2.18% on required reserve balances and on excess reserve balances held at the Fed, many credit unions will park excess funds in their Fed reserve account to maintain liquidity. These liquid funds are necessary as credit unions continue to report strong loan demand, CUNA Mutual said.
Savings and Assets
Credit union savings balances fell in October by 0.1%, less than the 0.5% decline in October 2017. Savings balances grew at a 7% seasonally-adjusted annualized growth rate in October, above the 5.2% reported one year earlier. Credit unions are experiencing a pickup in deposit growth as gas prices fall and disposable income increases due to the recent tax cuts. The national savings rates (personal savings as a percent of disposable personal income) has remained around the 6-7% range during the last couple of years, boosting household balance sheets and new worth. With consumer confidence at the highest level in 18 years, Americans are in the mood to spend and not necessarily increase savings further due to expectations of faster income growth in 2019, the report stated.
Capital and Other Key Measures
The credit union system has become significantly more productive over the last 18 years. “Back in the year 2000, it took on average 0.38 full time credit union employees to manage every $1 million in assets. Today that ratio stands at 0.21, a 45% improvement in productivity, or 2.8% increase in productivity per year. Today there are 305,000 full time employees working at credit unions managing $1,471,000 million in assets. The number of employees working at credit unions today would have been 559,000, (0.38 x 1,390,000) if credit union employees had the same level of productivity they did back in 2000. The net result is 254,988 (559,000 – 305,000) jobs were not filled due to improvements in human and physical capital. Smaller asset-size credit unions reported bigger improvements in productivity ratios over the last 18 years; however, larger credit unions are still more productive due to their economies of scale,” CUNA Mutual said.
Credit union capital balances grew 6.7% in the year ending in October, slightly below the 7% average set over the last twenty years.
Credit Unions and Members
As of October 2018, CUNA estimates 5,647 credit unions were in operation, down 201 from October 2017. Year-to-date the number of credit unions fell by 153, significantly less than the 174 reported in the first ten months of 2017.
Credit union consolidation and concentration is expected to continue at its long run pace in 2018. Since 1980, the number of credit unions has declined by roughly 3.5% each year. “If we apply this exponential ‘decay’ rate to the current number of credit unions, 5,647, we should expect another 198 credit unions to exit the financial system in 2019. If we forecast out a little further, according to the laws of exponential decay, there will only be 2,769 credit unions in 20 years, half as many as there are today. Fortunately, credit union assets follow an average annual exponential growth of 7%. This means the time it takes for credit union assets to double (currently $1.471 trillion) is only 10 years,” the company said.
Credit union memberships grew a modest 284,000 in October, or 0.24%, but faster than the 84,000 new members, or 0.07%, added in October 2017. Year-to-date credit unions added 4.7 million new members, faster than the 3.7 million members added during the similar period in 2017. October’s seasonal factors typically shave off 0.23 percentage points from the underlying trend membership growth rate.
Total credit union memberships reached 118.3 million in October, 5.4% more than October 2017 and the fastest pace in more than 25 years. “Expect membership growth to slow slightly in 2018 as loan growth slows slightly,” the report stated.