By Richard L. Harris
Credit unions have a positive outlook on future growth and lending opportunities.
In fact, according to NAFCU's May Credit Union Sentiment Index (CUSI) – an index based on NAFCU member responses to eight questions on growth and earnings outlook, lending conditions and regulatory burden – credit unions characterized their outlook for growth over the next 12 months as either "somewhat" or "very good." Among those with a positive growth outlook, the economy and loan demand were cited as the main reasons.
This should come as no surprise. Credit unions have always had a strong pulse on their members' wants and needs. However, credit union leaders also need to be aware of the current trends and how they can impact their institution's bottom lines in these ever-changing and sometimes unpredictable environments.
For credit union executives and board members, this means looking ahead and planning accordingly, and it is also worth taking a closer look now at today's interest rate and lending environments.
As the Federal Reserve continues normalizing monetary policy, we are likely to see one or two more interest rate hikes in the second half of this year. That decision will hinge crucially on wage and price growth developments in the coming months. That being said, credit unions must be prepared and price their share accounts accordingly.
The federal funds rate target is now at a level last seen in 2008. The Federal Open Market Committee (FOMC) – the policy-setting arm of the Federal Reserve – expects that with further policy adjustments, economic activity will expand at a reasonable pace and labor market conditions will remain strong.
One potential risk to credit unions as rates move higher is that members slow down their prepayments on loans and investments. This might spur credit unions to look elsewhere to obtain funding. Credit unions will need to keep proper pricing to maintain a balance on their competitiveness and liquidity.
Furthermore, with the auto and housing markets cooling, credit unions may need to shift their focus to credit card loans and home equity lines of credit.
NAFCU's monthly Macro Data Flashreports note that the vehicle sales industry faces several headwinds, including higher borrowing costs and tightening access to credit. The new-car segment also faces increasing competition from the used-vehicle market. According to a report by Cox Automotive, an estimated 3.9 million vehicles will return to the market off-lease in 2018. In addition to the sheer volume, products that consumers are more interested in, such as SUVs and pickups, are expected to make up a larger portion of the off-lease vehicles compared to previous years.
Vehicle sales also continue to shift from passenger cars to light trucks. The latter now represents a record high share of the market (almost 70%), while sales of the former are at the lowest level since 2009.
Knowing this trend, credit unions should not rely too heavily on auto loans. Auto loans have been a source of growth for many credit unions in recent years, but the market has grown stagnant as demand has waned. Credit unions may not be able to rely as heavily on auto lending as they have in the past.
The housing market also faces its own set of obstacles, particularly higher material costs, labor shortages and rising mortgage rates.
The median price of new single-family homes has increased year-over-year for 11 consecutive months.
Regarding sales of existing homes, affordable inventory is still lacking. According to a study by Trulia, the number of starter homes for sale plummeted 14.2 percent between the first quarters of 2017 and 2018. Meanwhile, the portion of income needed to buy a starter home increased by a substantial 4.2 percentage points. This was in part due to rising mortgage rates, which hit a four-year-high in April according to Freddie Mac.
In spite of the fact that most credit unions face regulatory limitations on the amount of business loans they can extend, the industry is expanding in this area. Over the past 10 years, the number of credit unions offering business loans has increased 20 percent; a small business can now get a loan at more than 2,000 credit unions. For 18% of credit unions, business loans make up at least 5% of their total loan portfolio. A decade ago that figure was just 8% of credit unions.
All this growth has taken place against a backdrop of declining business vitality. Startups are becoming rarer, and consolidation is happening more frequently.
The good news for credit unions is that even if these trends persist, they have proven that they can operate successful business lending programs in such an environment. And if lawmakers do create more favorable conditions for startups and address credit unions' arbitrary business lending restrictions, the industry is well positioned to capitalize.
The overall economy remains strong and credit unions will continue to thrive because of their intense and steady member-first focus. Continued changes in the interest rate and lending environments will allow credit unions to serve members in new and different ways – something that can spur even greater member satisfaction and loyalty.
Richard L. Harris is chairman of NAFCU and president and CEO of Caltech Employees Federal Credit Union.