By Ray Birch
PLANO, Texas—Credit unions should not be overly aggressive with loan growth this year, according to one economist, who is warning doing so could lead the industry back to another liquidity crisis.
Brian Turner, president and chief economist of Meridian Economics, is advising credit unions to pay more attention to liquidity levels than loan growth as the year advances.
“If credit unions push for too much loan growth this year, I’m not sure that is a good strategy,” Turner told CUToday.info.
He acknowledged the change in philosophy will be a challenge, as loan growth is how credit unions typically measure themselves.
“In this environment it is bad or risky doing that now because of the volatility of core deposits,” he said. “There's a tremendous amount of volatility that remains, and the volatility exists in checking, share drafts and regular savings.”
Significant Decline in Deposits
Turner pointed out that core deposit numbers have dwindled significantly over the last year “for obvious reasons.”
“Most importantly is that we've got more members who are living paycheck to paycheck because of high prices,” he said. “They're even drawing on regular savings accounts. So, you have a net outflow pressure on core deposits right now in terms of the industry's cash surplus.”
Turner reminded that in any year loan growth for the sake of loan growth is never a sound strategic plan.
Brian Turner
“And that is a really bad plan right now. Loan growth needs to be in line with what the projected share growth is going to be,” he said. “I think, at least through the first half of this year, that volatility will remain in core deposits.”
A Return to 2021
But Turner also believes loan growth is going to markedly increase this Spring and into the summer.
“What's going to happen is a return of 2021, where we had loan growth but at the same time we ran out of liquidity,” Turner said. “We warned credit unions to prepare for that issue in 2021--but credit unions weren't very diligent.
“I go back to credit mitigation and liquidity being the most important variables for credit unions this year,” continued Turner. “Boards should not be putting stress on management to render high loan growth in 2024, and management should refrain from seeing loan growth as the pivotal performance variable to judge success. In fact, it’s quite the contrary.”
What Has Driven Thinking?
Why the muted embrace of lending growth for the past several years?
“That is due to anticipated post-COVID dynamics, elevated inflation and the impact it all would have on deposits and liquidity,” he said. “Our total return assessment showed it more important to remain strong in liquidity rather than reallocating to investments and limit loan growth to no more than 1% greater than share growth. This time, it’s basically the same but now enters credit risk exposure—too much debt, too much paper wealth but weaker liquid wealth, continued elevated inflation with future upward pressure returning and higher unemployment just around the corner.”
The Eye on Risk
Turner advised credit unions to ramp up their attention to risk.
“Make sure that at least 85% of total new originations are B+ underwritten or better to help manage credit mitigation,” Turner advised. “Expect continued volatility in core deposits over the next couple of quarters as members cope with high prices and more live a paycheck-to-paycheck existence. Expect another 1%-2% decline in core deposits in 2024 and adjust permissible loan growth accordingly so you don’t put yourself into another liquidity crisis.”