Credit union lending is booming and the positive trend is expected to continue in 2018, according to the chief economist for CUNA Mutual Group.

According to Steven Rick, who also is a director for the Madison, Wis.-based company, credit union loan balances rose 0.7 percent in January – an improvement over the 0.6 percent pace reported in January 2017, and an increase of 10.9 percent during the last 12 months.

Credit union seasonally adjusted annualized loan growth reached 11.4 percent in January 2018, the fastest pace since January 2004, according to CUNA Mutual Group’s latest Credit Union Trends Report. According to Rick, this latest credit cycle boom “has not yet reached its apex and looks capable of moving into its fifth year of double-digit loan growth.”

Steven Rick, chief economist at CUNA Mutual Group
Steven Rick, chief economist at CUNA Mutual Group

“Why is this credit boom so sustainable? Three words: faster membership growth,” Rick wrote in the March Trends Report, released Monday. He noted credit union membership growth during the last four years has exceeded 3 percent, compared to only 1 percent annual membership growth in 2004-2005, the last time loan growth exceeded 10 percent.

“Credit unions today can increase loan balances not only with existing members, but also with many new members discovering for the first time all of the quality financial products and services of a full-service, modern-day credit union,” Rick wrote.

Credit union consumer installment credit balances – consisting of auto, credit card and other unsecured loans – rose 1 percent in January, similar to the 1.1 percent pace set in January 2017. Rick said this increase was due to “strong” auto lending offsetting falling credit card balances.

January’s credit card loan seasonal factors typically are the “most negative” of the year at 2.32 percent, Rick explained. He said credit union consumer installment credit grew 11.6 percent during the last year, bucking the downward trend of the total market excluding credit unions, which grew only 4.6 percent. If guaranteed student loans are factored out, then consumer credit increased only 4.2 percent for non-credit union lenders.

“Credit unions now make up 11.2 percent of the consumer loan market, up from 10.5 percent a year ago,” Rick said.

Auto lending ticks up

Credit union used auto loan balances rose 1.2 percent in January, faster than the 0.9 percent pace set in January 2017, and rose 12.4 percent during the last 12 months.

On a seasonally adjusted annualized basis, used auto loan balances rose at a “very robust” 14.7 percent in January, which Rick characterized as a “rapid acceleration” from just six months ago and the fastest pace since January 1997.

“Strong consumer fundamentals are driving used auto loan growth despite high used vehicle prices: an improving labor market, low oil prices, faster wage growth, low interest rates, expanding driving-age population, improving construction activity and better household balance sheets,” Rick said. “January’s used auto loan growth is even more remarkable given that January’s used auto loan seasonal factors are typically the most negative of the year at -0.68 percent.”

Vehicle sales at a seasonally adjusted annualized sales rate were 17.2 million in January, 1.6 percent below the pace set one year earlier. With the Federal Reserve expected to raise interest rates 1 percent this year, Rick said credit unions should anticipate auto loan rates will rise, which he asserted will hinder new-vehicle sales in 2018.

“Expect auto sales to slow to a 17.1 million sales pace in 2018, slightly less than the 17.3 million pace set in 2017,” he said. “Factors supporting auto sales include: attractive discounting, low gas prices, ample access to credit, low debt burdens, strong job growth and growing hourly earnings.”

First mortgage originations down from 2016 record

Credit union first mortgage originations slowed to $141.5 billion in 2017, a 2.4 percent decrease under the record $145 billion in originations in 2016. Credit unions sold 35.2 percent of those originations into the secondary market, a lower percentage than the 39.5 percent in 2016.

“The stage is set for another strong year of credit union first mortgage growth as rising purchase activity offsets slower refinance business,” Rick said.

The Federal Reserve is reinvesting part of the principal payments from its holdings of agency debt and agency mortgage-backed securities into new agency mortgage-backed securities, Rick noted, which he said is keeping downward pressure on market interest rates. He said CUs should expect mortgage interest rates to rise 1.75 percent over the next few years and reach 5.75 percent by 2020 as the 10-year Treasury interest rate approaches its long-run equilibrium average of 4 percent.

Rick said he expects home prices to rise 5 percent to 6 percent in 2018 as the economy adds another 2.2 million jobs, potential homebuyers jump off the fence and purchase as interest rates rise and young adults release some of their pent-up demand for housing. “Low gas prices also are allowing potential homeowners the ability to increase their pace of savings accumulation for a home down payment. Furthermore, rising rents are tilting the rent-versus-buy calculation more and more in favor of purchasing,” he said.

Slowdown in savings

Credit union savings balances fell 0.9 percent in January, below the 0.6 percent decline reported in January 2017, which Rick said was due to a surge in post-holiday consumer spending. He pointed out January savings balances have historically declined 0.2 percent due to recurring seasonal factors.

The distribution of credit union savings tilted toward regular shares and share drafts in 2017, as credit union members awaited an increase in the fed funds interest rate, and, soon thereafter, credit union share certificate interest rates. Credit union asset growth rates vary significantly by asset size, Rick noted. Billion-dollar credit unions reported asset growth of 8.5 percent in 2017, approximately seven times faster than the smallest credit unions’ growth rate of 1.2 percent.

More membership growth expected in 2018

Credit unions added 463,000 memberships in January, which Rick said was “significantly” higher than the 209,000 gain recorded in January 2017. He said the increase was due to strong credit demand and robust job growth, noting the economy added 313,000 jobs in January 2018, significantly more than the 216,000 jobs added in January 2017.

“Rapid job creation is just one sign the job market is tightening quickly and slack is diminishing,” Rick said. “With the economy expected to add another 2.2 million jobs in 2018, credit unions should expect membership growth to exceed 3.5 percent.”

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