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Steven Rick Outlines Economic Conditions Facing Credit Unions
Wednesday, June 1, 2016 6:25 AM

Loan Balances Will Increase by 10 Percent

Approaching the halfway point of 2016, many wonder what the rest of the year, and even 2017, will look like. Will the Fed increase interest rates? (Perhaps, slightly.) Will job growth continue? (Probably.) Will the U.S. economy continue to improve? (It sure looks that way!)

Steven Rick, chief economist for CUNA Mutual, presented these predictions and more at Catalyst Corporate's Accelerating Success Conference earlier this month in Las Vegas. Rick forecasted issues that may impact credit unions over the next year and explained the implications. Based on his extensive research, he predicts:

  • Credit union savings balances will grow by 5 percent in 2016 and 4 percent in 2017. As the Federal Reserve continues raising short-term interest rates this year, expect the anticipated transfer of funds to money market mutual funds to finally materialize. With inflation in the offing and the windfall from lower oil prices disappearing, cautiously optimistic members will seek higher returns.
     
  • Membership growth will continue to increase in 2016 by 3 percent. This is due to more indirect auto lending and spreading word of the positive credit union value proposition. Expect membership growth in 2017 to be slightly lower, at 2.75 percent, as the auto lending boom begins to slow and indirect borrower memberships decline.
     
  • Credit union loan balances will increase by 10 percent in 2016 and 9 percent in 2017. Loan growth this year will be only marginally lower than the impressive loan growth of last year. As the economy continues to expand, expect households to continue to release pent-up demand for autos, furniture, and appliances throughout 2016, and at a slightly slower pace in 2017. New auto loans, credit card loans, and purchase mortgage loans will remain strong growth areas.
     
  • Credit quality will remain healthy in 2016 and 2017. The improving job market will contain the numerators of the loan quality ratios, and fast loan growth will expand the denominator. This will push the delinquency ratio down from 0.81 percent in 2015 to 0.75 percent in 2016 and 2017. Net charge-offs will likewise decline from 0.48 percent in 2015 to 0.45 percent in 2016 and 2017, respectively.
     
  • Credit union return on assets will decline marginally to 0.70 percent in 2016 and could dip to 0.65 percent in 2017. Interest margins will be helped by strong loan growth in 2016 but hurt by the flattening yield curve. Mortgage refinancing and its resulting revenue will decline in 2016. The effect of overfunded loan loss allowance accounts, which kept loan loss provision expenses very low for the past few years, will dissipate in 2016. Higher funding costs, higher operating expenses due to a tighter labor market, and lower fee income from overdrafts and insufficient funds will also contribute to lower return on assets in 2016 and 2017.
     
  • Net worth ratios will increase to 11 percent in 2016 and 11.2 percent in 2017. Even with the expected slight decline in earnings, capital ratios will continue to rise this year and next, as soft savings inflows provide for only modest asset growth.

All in all, 2016 and 2017 will be an exciting time for credit unions and the U.S. economy as a whole. While changes this year likely will be more moderate, Rick says expect the pace to pick up substantially in 2017.

Handouts for Rick's and other Accelerating Success Conference presenters are available in the Learning Center section at catalystcorp.org.

Further insights regarding economic conditions will be provided during Catalyst Corporate’s 39th Annual Economic Forum, which will be held Oct. 3-5 at the Omni Mandalay Hotel in Las Colinas, Texas. Registration begins in July and details will be posted on catalystcorp.org.