MADISON, Wis.–The CU industry loan-to-share is expected to hit an eight-year-low, and yield-on-assets ratio should hit an all-time low by year end, according to a new forecast from CUNA Mutual. ROA is also expected to decline.
Meanwhile, lending at credit unions is projected to grow just 5% in 2021.
One bright spot: new-auto loan balances rose at a 0.1% pace in February, the first positive growth number since July 2019, according to CUNA Mutual’s April Trends Report, which is based on CU data through February 2021.
Just 221,000 new members were added during the first two months of the year, down from 641,000 reported in the first two months of 2020, the Trends Report added.
Another bright spot: The CUNA Mutual forecast sees a much stronger economy ahead.
Overall, CUNA Mutual’s economists said they expect the U.S. economy to grow at a “remarkable” 6% in 2021. That would be the fastest annual growth since the 7.2% reported in 1984, which followed on the heels of the severe recession in 1982.
“Looking farther down the road we expect 4% growth in 2022. The last time the economy grew at 4% or above was way back in 2000, right before the stock market crash in 2001,” CUNA Mutual stated.
Here’s a look at how credit unions performed by category during the first two months of the year:
Lending
As has been the case in recent years, CUNA Mutual noted the overall data is skewed, as large credit unions reported significantly faster loan growth in 2020 as compared to smaller credit unions.
Credit union loan balances rose 0.24% in February, faster than the 0.22% reported in February 2020, and 5% during the last 12 months. February is historically the weakest loan growth month of the year, with seasonal factors typically shaving off 0.6 percentage points from the underlying trend growth rate, CUNA Mutual reminded.
“Credit union members will continue to deleverage their balance sheets this year by paying off debt with stimulus checks and funds from cash-out mortgage refinances,” the Trends Report forecasts. “Therefore, we are forecasting credit union loan growth of only 5% in 2021, down from 5.3% last year. This will lower credit unions’ loan-to-asset ratio from 64% in December 2020 to 59% by year end, which will be the lowest since 2013.
CUNA Mutual said fewer loans as a percent of assets will contribute to the lowest earnings since the Great Recession.
“We are now forecasting credit union return-on-asset ratios to fall to 0.6% in 2021, down five basis points from the 0.65% reported in 2020,” CUNA Mutual said.
Consumer Installment Credit (CIC)
Credit union consumer installment credit balances (auto, credit card and other unsecured loans) rose 0.45% in January, similar to the 0.5% reported in February 2020, the Trends Report stated.
“Consumer installment credit year-over-year growth rates have been declining over the last 2 years due mainly to a slowdown in auto loans,” the analysis notes. “Credit union members have been using funds from cash-out mortgage refinances to pay down higher-rate consumer loan debt and using around 30% of their stimulus checks to pay down debt.”
Credit union consumer installment credit grew 1.7% during the last year, faster than the total market excluding credit unions which fell 0.3%. The total consumer installment credit excluding credit union and government student loans fell 3% during the last 12 months, the Report found.
Vehicle Loans
According to the Trends Report, credit union new-auto loan balances fell 0.9% in February, weaker than the 0.6% decline set in February 2021, and 4.3% during the last 12 months.
“On a seasonally-adjusted annualized basis, new-auto loan balances rose at a 0.1% pace in February. the first positive growth number since July 2019,” the Report highlighted.
CUNA Mutual noted the first quarter of the year is typically the weakest quarter for credit union new-auto loan growth due to various seasonal factors, with February historically the weakest new-auto loan growth month of the year, with seasonal factors typically adjusting -0.68 percentage points from the underlying trend growth rate.
Real Estate
Credit union fixed-rate first mortgage loan balances rose 0.36% in February, above the -1% decrease reported in February 2020, due to historically low mortgage interest rates, according to CUNA Mutual.
“Credit union fixed-rate first mortgage loan balances rose 18.2% over the last 12 months, significantly faster than the last three years,” the analysis pointed out. But it also added, “Interest rates are moving higher due to higher inflation expectations (10 basis points) and higher real interest rates (eight basis points).”
CUNA Mutual’s economists forecast they expect mortgage interest rates to remain below 3.5% for the rest of the year.
Surplus Funds (Cash + Investments)
Surplus funds rose to 33.9% of assets in February, from 33% in January due to a 1.8% surge in savings deposits. Moreover, the ratio is up seven percentage points from the 26.8% reported in February 2020 due to deposit growth exceeding loan growth over the last year (19.6% versus 5%), according to the Trends Report.
“The end of the COVID-19 pandemic is expected to decrease credit union loan-to-asset ratios to 59% by the end of 2021, down from 64% at the end of 2020, due to expected loan growth of 5% and expected asset growth of 13.5%,” the Trends Report states. “This five percentage point change in the mix of assets, from higher- rate loans to lower-rate surplus funds, will lower credit union yield-on-assets ratios 14 basis points this year, holding all else equal. But of course, all else is not being held equal as short-term market interest rates hover around record lows. This ‘rate effect” could push yield-on-asset ratios down another 20 basis points. This combined 34 basis point effect could lower credit union yield-on-asset ratios from 4.54% in 2020 to 3.2% in 2021, the lowest in credit union history.”
Savings & Assets
Credit union savings balances rose 1.8% in February, below the 2.2% gain reported in February 2020, due to the seasonal factors of tax refunds and bonuses being deposited in credit union members’ share draft and regular share accounts, which increased 4% and 2% respectively, the Trends Report stated.
February’s seasonal factors typically add 1.48 percentage points to the underlying savings trend growth, the biggest of the year, the report added.
Credit union savings balances grew at a 14.2% seasonally-adjusted annualized growth rate in February, due mainly to the ongoing COVID-19 stimulus checks and reduced service spending.
“We forecast credit union savings balances to grow 15% in 2021, significantly above the 7% long run 30-year average, but below the record setting 20.3% growth rate set in 2020,” CUNA Mutual stated. “Credit union savings growth will remain strong due to recent additional stimulus checks, COVID-19 uncertainty and job and income insecurity. We expect share draft accounts and money market deposit accounts to each grow over 20% in 2021 but share certificate balances to decline by 5-10%.”
Capital & Other Key Measures
The credit union industry’s average loan net charge-off rate fell to 0.35% in the fourth quarter, and below the 0.59% reported in the fourth quarter of 2019. The loan charge off rate is the lowest in over a generation and is below its “natural” long-run rate of 0.5%, the report states.
The charge off rate is low due to credit union loan forbearance programs, stimulus checks, enhanced unemployment benefits and unemployment concentrated in low wage service sector jobs, the analysis added.
Meanwhile, CUNA Mutual reported the credit union loan delinquency rate (loans two or more months delinquent as a percent of total loans outstanding) fell to 0.55% in February from the 0.64% reported one year earlier.
Credit Unions & Membership
Credit union membership growth slowed significantly during first two months of 2021, adding 544,000 new memberships versus the 641,000 reported in the first two months of 2020, CUNA Mutual stated.
The report added that in percentage terms, credit union memberships rose 0.13% in February, 0.43% year-to-date and 3.1% during the last 12 months. Memberships grew at a 3.5% seasonally adjusted annual rate in February, up from 3.4% in February 2020.
“The ending of the COVID-19 pandemic is expected to keep credit union membership growth over 3% during the next few years. Americans typically join credit unions to obtain credit,” the report stated. “With loan growth expected to be 5% this year and 8% in 2022, membership growth is expected to rise 3% in 2021 and 3.5% in 2022.”