MADISON, Wis.—Credit union lending continues to slow as share growth continues to climb, the latest CUNA Mutual Group Trends Report shows.
What may be considered signs consumers are pulling back amid recession concerns, over the last 12 months credit union loan balances increased 6.6%, a significant downshift compared to the double-digit pace set during the last four years, and during the first eight months of the year CU deposits rose $79.7 billion, the data indicate, according to CUNA Mutual.
Total Credit Union Lending
Credit union loan balances rose 1% in August, above the 0.8% pace set in August 2018. The pace of consumer installment credit growth has decelerated recently to 7.6%; however, this is still more than the 4.7% pace of all other lenders bringing the credit union share of the total consumer installment credit market to 11.6%, up from 11.4% one year ago. The credit union share of the first mortgage originations market fell to 8.2% in the first half of 2019, down from 8.8% during the first half of 2018, but up from 2.6% prior to the 2008-09 financial crisis. Credit unions sold off 35% of their first mortgage originations to the secondary market in the first half of the year, up from 30% one year earlier, according to the Trends Report.
Credit Union Consumer Installment Credit (CUCIC)
Credit union consumer installment credit loan balances (auto, credit card and other unsecured loans) rose 1.6% in August, a slight acceleration from the 1.4% pace set in August 2018. During the last 12 months, credit union consumer installment credit grew 7.6%, twice as fast as the total market excluding credit unions and government student loans. According to the Federal Reserve cited in the Trends Report, consumer credit outstanding rose $17.9 billion for all lenders in August, $19.8 billion in non-revolving credit and a decline of $1.9 billion in revolving credit. “Going forward, expect credit growth to slow due to supply-side constraints. In recent years, lenders have been quick to tighten lending standards at the first sign of deterioration in credit quality. If the unemployment rate rises in 2020, expect loan delinquencies and charge-offs to rise also,” the report stated.
Vehicle Loans
Credit union new-auto loan balances rose only 0.2% in August, below the 1.4% pace set in August 2018. Currently, new-auto loan balances are falling at a 1.8% seasonally-adjusted annualized growth rate, “a much slower pace compared to what we have seen over the past few years,” CUNA Mutual Group said. The weak credit union new auto loan growth rates are due to interest rates rising 130 basis points over the last two years, high credit union loan-to-share ratios, and cash-out refinances paying off new auto loan balances.
Vehicle sales rose to a 17.5 million unit seasonally-adjusted, annualized sales rate in August, up from 17.4 million in July and above the 17.4 million sales pace set in August 2018 due to the tight labor market keeping consumer confidence elevated. “Vehicles sales are expected to slow to 16.5 million units in 2019, which is considered by economists to be the ‘inherent demand’ for the U.S. auto sector. As the economy moves into the late expansion phase of the business cycle, we believe auto sales number to continue to trend lower over the next few years. This will create a headwind for credit union new auto loan growth for the next few years,” CUNA Mutual Group said.
Real Estate Secured Lending—First Mortgages and Other Real Estate
Credit union fixed-rate first mortgage loan balances grew 1.5% in August, faster than the 0% pace reported in August 2018. And when comparing year-over-year growth, fixed-rate first mortgage balances rose 10.3%, which is above the 10.0% reported in the year ending in August 2018. Adjustable-rate first mortgage loan balances grew slower than fixed-rate loans over the last year, rising 2.7% during the last year, and slower than the 8.0% pace reported in the year ending August 2018. Credit unions now hold $454.8 billion of first mortgages on their books, 73% of which are of the fixed-rate variety. Home equity lending posted another weak month in August, decreasing 0.1%, below the 0.5% pace reported in August 2018. The recent drop in 30-year mortgage interest rates has encouraged some members to refinance their first mortgage loan and cash out some home equity to pay down home equity loan balances.
“With home prices expected to rise another 4% during the next year, we expect home equity loan balances to begin growing soon after the end of the refinance boom,” the report stated.
The contract interest rate on a 30-year, fixed-rate conventional home mortgage fell to 3.62% in August, from 3.77% in July, and significantly below the 4.55% reported in August 2018.
“We expect the 30-year mortgage interest rate to remain below 4% during the next year, due to long-term interest rates remaining low worldwide. We expect the low interest rates to have a positive impact on new and existing housing demand during the next year,” CUNA Mutual Group said.
Home prices rose 0.4% in August from July, according to the Core Logic Home Price Index, and 3.6% year-over-year. Home prices are now rising only slightly faster than average hourly earnings, which grew 3.2% over the last year. Over the long run, home prices should rise as fast as household income. Home prices are rising due to increasing demand running into a limited supply of homes for sale. Demand for homes is expected to increase in 2020 due to rising household formations and the tightening labor market boosting wage growth, the report said.
Surplus Funds (Cash + Investments)
Credit union surplus funds rose $14 billion, or 3.7%, in August due to a surge in month end savings deposits. The surge in deposits both helped to fund strong loan demand ($10.6 billion) and reduce borrowings by $1.3 billion. Capital grew by $2.5 billion, and credit union surplus funds as a percent of assets rose to 24.8% in August, up from 24.7% in August 2018. This is still one of the tightest credit union liquidity positions since August 2000. The obverse of the rising surplus funds ratio is the falling loan-to-asset ratio, which reached 70.7% in August, from 71.1% last August, as asset growth outpaced loan growth. Over the last few year, the shift in the mix of credit union assets toward higher-yielding loans and away from lower-yielding investments has pushed up credit union asset yields. Over the last year, credit union yield-on-asset ratios rose to 4.01% during mid-year 2019 from 3.72% during mid-year 2018 as the asset portfolio shifted toward loans earning an average return of 4.88 and away from investments earning an average return of 2.27%. The yield-on-loans actually rose from 4.60% in the second quarter of 2018 to 4.88% in the second quarter of 2019 as amortizing loans re-priced to today’s higher interest rates, and with credit union cost of funds only rising 24 basis points during the last year to 0.85%, net interest margins increased 11 basis points in the second quarter to 3.17%, compared to 3.06% a year earlier.
Savings and Assets
Credit union savings balances rose 1.7% in August, above the 1.1% rise in balances reported in August 2018 due to August 31st landing on a Saturday after a payroll Friday. August is normally one of the weakest months of the year for savings growth due to seasonal factors, such as vacation spending and auto loan down payments. Credit union deposit growth is becoming more unbalanced. During the first eight months of the year, credit union deposits rose $79.7 billion. Contributing to this growth was a $35.5 billion increase in certificate deposits, thus making up 45% of total deposit growth. Savings balances grew at a 9.1% seasonally-adjusted, annualized growth rate in August, due to high share certificate rates, volatile equity markets, cash out mortgage refinances being deposited in saving accounts. “We expect savings balances to grow 7% in 2019 and 8% in 2020 as members save more due to rising concerns regarding an economic slowdown,” CUNA Mutual Group said.
Capital and Other Key Measures
The credit union movement’s weighted average loan-to-share ratio fell to 83.9% in August, down from the 84.6% reported in August 2018, due to savings balance growth (7.5%) outpacing loan balance growth (6.6%). Previous peaks in loan-to-share ratios occur right before recessions, such as the 79.8% in 2000 and 84.1% in 2007. More loans lead to higher earnings and capital ratios, holding all else equal. However, credit unions with higher capital ratios tend to lend more, which leads to even higher earnings and capital ratios in the future and creates a virtuous feedback loop. The loan delinquency rate (loans two or more months delinquent as a percent of total loans outstanding) fell to 0.64% in August, down from 0.67% in August 2018. This decline in the delinquency ratio was caused by the loan balances’ denominator growing faster (6.6%) than the delinquent loans’ numerator (2.2%), the report stated.
Credit Unions and Members
As of August 2018, CUNA estimates 5,488 credit unions were in operation, down 207 from August 2018. Year-to-date the number of credit unions fell by 115, which is above the 105 decline reported in the first eight months of 2018. The credit union movement contracted at a 3.6% pace over the last year, which above the long run average decline of 3.5% set over the last 39 years. Small credit unions continue to struggle with earnings. During the first half of 2019, credit unions with assets less than $20 million reported an average return-on-asset ratio of only 45 basis points, which is up 20 basis points from last year’s 25 basis points ratio. Credit unions reported a 5 basis point increase in return-on-asset ratios in the first half of 2019 compared to 2018 due to a 6 basis point increase in “gross spread” as loan growth higher interest rates pushed up yield-on-asset ratios 21 basis points. Provision for loan loss expenses as a percent of average assets fell 3 basis points. These positive income statement items were offset somewhat by a 2 basis point increase in operating expenses and a 2 basis point decrease in “other income”.
Credit union memberships rose 386,000 in August, or 0.3%, below the 561,000 new members, or 0.48%, added in August 2018. During the last year, credit unions added 4.1 million new members – below the 5.1 million growth pace set through August 2018 – which translates into a 3.0% seasonally-adjusted, annualized growth rate. Membership growth is being driven by job gains and Americans’ demand for credit.
"Membership growth is also being supported by an unintended consequence of the Durbin Amendment of the Dodd-Frank Act, which capped the fees large banks can charge merchants to process debit card transactions (21 cents plus 0.05% of the total charged). To make-up for this lost revenue, banks increased their monthly fees for having a debit card or a checking account. The higher charges are driving many bank customers to their local lower cost credit unions," according to CUNA Mutual's analysis.