FRISCO, Texas–During an update on the economy here, credit unions were told to expect lending to slow in certain categories, but urged to be prepared to leverage opportunities in used cars and mortgages.
That advice, plus six questions CUs should be asking themselves, were also shared.
Speaking to Catalyst Corporate’s Economic Forum here, Steven Houle, VP-Advisory Services with Catalyst said in some ways 2019 is far different from just last year–“Who would have thought a year ago we’d be talking negative interest rates?”–but in other ways this year is an extension of some ongoing trend lines.
Houle noted the U.S. economy grew 2% during the second quarter. The IMF had projected 3.3% growth for global economy and 3.6% for the U.S. in 2020, which have been revised down to 3.2% and 3.5% respectively.
As CUToday.info has reported, consumer spending continues to drive the U.S. economy even as other segments of the economy are slowing, such as inventories, business investments, exports and farming. The ongoing trade dispute with China has also slowed the economy some.
“One of the key things giving legs to this expansion is central bank policy, not just here in the U.S., which has been very accommodative,” said Houle.
Issues Affecting Credit Unions
Issuing affecting credit union performance, according to Houle:
- The key thing is real estate loans for credit unions. He noted the housing market was showing a bit of a slowdown at this time last year, but August existing home sales increased 1.3% MoM to a seasonally adjusted annual rate of 5.49 million units, a 17-month high.
- The median sales price for existing homes increased 4.7% YoY to $278,200.
- Existing inventory is down to 4.1 months. “Six months of inventory is considered a balanced market.”
“Falling mortgage rates are improving prospects and home sales should remain strong into next year,” said Houle.
Other topics touched on by Houle:
Auto Loans
- As credit unions are aware, vehicle sales remain strong. But with an average price of a new car at $37,195, and the average used vehicle priced at $20,247, the latter is driving the volume.
- New car loans were down $500 million through June at CUs, said Houle.
- “All vehicle loan growth credit unions are seeing is coming from used vehicles, due almost entirely to cost of new vehicles,” he said. “As you look at your marketing strategy and who you might target, realize the trends are pointing toward used vehicles.”
Unemployment
- Unemployment dipped to 3.7% in August, close to an 18-year low. The broader measure of underemployed and discouraged workers was 7.3%. “It’s so strong it’s very difficult to fill positions,” said Houle.
- Average hourly earnings continue to increase, which is good for inflation, he added.
Inflation
- Inflation remains tame at approximately 1.6% YoY, even as the Fed continues to strive for a 2% inflation target.
Federal Reserve
- The Fed has lowered fed funds rate by 25 BPs to target range of 1.75%-2%.
- The Fed lowered interest rate on excess reserves by 30 BPs to 1.8%.
- The Fed continues to cite global concerns and has acknowledged business investment and exports have weakened. It has telegraphed a strong likelihood of another rate cut by year-end, Houle told the meeting.
- “The record number of dissents raises questions about the uniformity of the Fed’s rate outlook,” said Houle. “In spite of all this, the committee’s outlook for the U.S. economy remains bright.”
The Yield Curve
- The yield curve has fallen between 45 and 62 basis points since March.
- The yield curve has inverted for the first time in 10 years.
- The big question: How will the Fed continue to “normalize” the yield curve in 2019 and 2020. “I think the Fed is going to have to lower rates one or two more times,” said Houle.
Credit Union Loan Growth
- Houle said the national data shows a slowdown in loans by half this year versus the rate of the past six years. “If (CUs are) a leading indicator of growth, then wow, it’s really taking shape quickly.”
- There has been growth in business lending among CUs.
- The previous times the 10-year Treasury fell to 1.50%, credit unions granted higher levels of mortgage loans, observed Houle. “Expect that trend to be similar this time. Be prepared as a credit union; real estate volume is going to be an opportunity for you.”
- While there is some thought Millennials aren’t interested in home ownership, Houle said he believes that is not the case; the generation simply has other issues prior generations did not, such as high levels of debt.
Loan Quality
- CUs are seeing record lows for charge-offs. “I have a hard time finding any real flag at the moment,” said Houle.
Deposits & Shares
- CUs are very good at raising deposits using rates, said Houle, “but I don’t know if we’re very successful at growing just core deposits. Collectively, that’s where we need to see improvement. We can all post high rates.”
- There has been $54 billion in certificate growth at CUs in 2019, due in large part due to rate. But regular shares were also up approximately $60 billion through mid-year.
- House said he expects to see no additional growth in cost of funds in near future. “And if Fed goes down one more time, you might not feel much pressure to lower non-term shares,” said Houle.
Liquidity
- Houle said liquidity profile at CUs has changed over last six months. “Overall, I think the liquidity profile going into last year was much tighter. It’s still critical, but I think we’ve seen some relief this year. But some of the discussions that need to be had around that topic need to be around the long-term forecast and planning. When it’s reactionary, you don’t really assess whether the growth is profitable.”
2019 & Beyond
- “We’re shaping up to have a very strong year in 2019. 2020 could be a little more challenging when you look at where the yield curve has gone.”
Questions to Ask
- How does a potential slower lending environment impact earnings?
- Does your projected earnings profile align with your growth and capital strategy?
- Do you understand members’ needs and expectations?
- Have you made your digital platform a priority, including mobile banking, remote deposit capture and a friendly website?
- Has the credit union segmented its members by profitability distribution?
- Has the CU identified what products drive profitability and by which means?