By Ray Birch
PLANO TEXAS—Later this year credit unions will recognize “their true balance sheet size” as market volatility begins to shake out, says one economist.
Brian Turner, president and chief economist of Meridian Economics, spoke with CUToday.info about what lies ahead for credit unions in the final months of the year.
Brian Turner
“The economic outlook represents a primary focus on credit and liquidity risk in 2024-25,” said Turner. “With rising delinquency and foreclosure filings, the deterioration in both consumer and residential loan markets is already bringing an element of adversity and credit risk to credit union balance sheets, liquidity, short-term earnings and, in the case of some credit unions, to their net worth profiles.”
Turner said not to be overly concerned with loan growth over the next few months, noting that credit unions should be primarily focused on credit mitigation and liquidity.
“And at prevailing market rates, higher than most portfolio yields, most credit unions’ loan revenue can actually increase, even at lower levels of loan origination,” he said.
More Volatility
“We still have a few more months in the volatility coming from core deposits—something that had caused many credit unions to experience a significant rise in cost of funds as they responded by issuing exceptionally high term certificate promotions,” continued Turner.
Turner added that CUs have been experiencing the maturity of most of these funds over the summer, and will do so in the fall months.
“So, the risk exposure relative to overall funding is already in place,” he said. “We don’t need to complicate it further by repeating 2021-2023, by being overly excited to grow loan portfolios during a marginal higher risk environment while seeing volatility in funding.”
Turner added, as he pointed out last year, that credit unions—over the next year or two—will begin to witness and experience what their true balance sheet size is and what it can actually support within its field of membership.
“For most, that will mean shrinking their balance sheet to properly position its allocations, earnings, liquidity, and credit mitigation in such a way as to not dilute its net worth profile,” he said. “For others, it might provide an opportunity for growth. But that will only happen to those who followed our 2020-24 recommendations by following a managed growth plan instead of myopically judging their performance as a financial institution based on loan growth.”