MADISON, Wis.—An interesting “phenomenon” is occurring now with the average asset yields trendline at credit unions—they are flat during a period in which credit unions are replacing low-paying investment dollars with new loans, noted one economist.
“With all these loans coming on the balance sheet you would think credit unions’ yield on average assets should be going up,” said CUNA Mutual Group Chief Economist Steve Rick. “After all, credit unions are taking money out of investments that earn 1% and putting them into loans with an average yield of 5%. We call that the mix effect—changing the mix of assets from investments to loans.”
But a CUNA Mutual analysis of credit union balance sheets shows the yield on average assets has not changed during this strong lending period. Rick credited that to the “interest rate effect.”
Rate Effect Offsetting Mix Effect
“New car loans, for example, are being booked at rates lower than rates on car loans made four to five years ago,” said Rick. “So as those old loans are paid off and replaced with new loans, the new loans’ lower rates are offsetting the higher yields created from moving money out of investments and into loans. The overall average yield on assets for credit unions did not change at all last year. The rate effect is offsetting the mix effect.”
Rick said that CUs with large portfolios of adjustable rate loans are in the best shape.
“And a number of credit unions, due to the Credit Card Act, have switched to adjustable rate cards, which they are benefitting from.”
However, in its latest Trends Report CUNA Mutual said credit unions can expect the situation to gradually change, with a prediction that average asset yields will rise over the next year as more and more funds are moved from the investment portfolio into new and used auto loans and additional mortgage lending.