WASHINGTON-Credit unions will need to become even more aggressive lenders in 2013, not only to take advantage of rising consumer confidence and less deleveraging, but to ward off some other challenges heading their way.
That is the forecast of Steve Rick, CUNA senior economist, who said the good news is that lending is coming back (5% projected growth in 2013 vs. 4% in 2012) and it will be more balanced across product lines than it has in the last several years. The bad news is banks are loosening their lending standards and will be bigger competitors than in recent years. On top of that, credit unions face increasing margin pressure due to assets repricing.
"Increased lending will take care of some of that drop in margin," said Rick, who projects the hit to spread in 2013 will be around 10 basis points after a year in which CU margins dropped a dramatic 21 BPs. "There are a lot of positives out there. The housing market is recovering nicely, pushing up home prices and restoring consumer confidence."
Rick sees a great deal of pent-up demand being released this year, especially regarding credit cards (5% to 6% projected growth) as consumers purchase more durable goods, like appliances. Auto loans, too, particularly new, will be stronger, with CUNA projecting new car loan growth to approach or exceed 9%, and used cars holding at about the same levels.
Credit unions will have to work all loan products hard, diving into existing members' financial data to steal loans away from other FIs to make up for the loss of a tremendous amount of refi business that Rick expects will end after this spring. "Credit unions enjoyed a massive amount of refi business last year, but it can't go on forever. That has really boosted earnings."
Offsetting Margin Declines
Rick believes that as refi business wanes it will be partially supplanted by purchase originations, as the economy and job growth improve and consumer confidence rises even further.
"But it won't replace all of that refi income, and our margins are continuing to fall. Our yield on assets is falling faster than our cost of funds-which have nearly hit rock bottom. Third quarter data showed CU margins at 2.91%, compared with 3.12% a year prior. Our cost of funds has dropped 21 basis points but our assets have fallen 42 BPs. We just have all these old loans and old investments repricing at today's low rates and we can't get much lower on cost of funds."
Rick noted that lower loan loss reserves are helping to offset some of the drop in margin.
As credit unions look more to lending to make up for shrinking margins, they are going to have to scrap with banks for consumer dollars, warned Rick, who noted that the latest Federal Reserve study indicates banks are loosening lending standards. "Just at the time when we are seeing the economy recovering and consumers borrowing again, the banks are healthy. They have rebuilt capital and are jumping back into the lending market with both feet. They will be tough competitors in 2013."
Rick added that CUSO activities and adjusting fee pricing can help offset the margin drop. "Sometimes credit unions are hesitant to revisit their fees and compare them against the current market. They can still price lower than the market, just not way below the market."
Despite the continued growth in members, Rick said CUNA is projecting slightly less savings growth (5% in 2013 vs. 6% in 2012) as consumer confidence grows and emphasis on savings declines.
Overall Rick projects the economy will come back steadily in 2013 to have a "halfway decent year," but adds the so-called fiscal cliff is the wild card. "It's the big unknown."
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