With recession threat looming, is it time for credit unions to pull back?
Credit unions need to brace for a continuing decline in lending.
The U.S. is experiencing its longest economic expansion in history and unemployment remains at lows not seen for 50 years. But that won’t last forever.
Because of that, credit unions should consider tightening lending standards as loan growth continues to decline and to prepare for a possible mild recession in 2020, experts said.
“I have been predicting a recession in 2020 for two years now, mainly due to a slowdown on overall credit creation, meaning new loans,” said Steven Rick, chief economist for Madison, Wis.-based CUNA Mutual Group.
During the second quarter, loans outstanding increased by more than 6%, according to data from the National Credit Union Administration. That’s down from an uptick of 7.9% in the first quarter, according to NCUA data. Over the past 40 years the average for loan growth has been 7.2%, Rick said.
There are two primary reasons for the slowdown in lending. First interest rates were on the rise prior to recent cuts by the Federal Reserve Board, and there simply is not much pent up demand for durable goods, Rick said. For example, 2015 to 2018 were boom years for auto sales, but now people are having to pay for all the items they bought during the past few years, Rick added.
Consumers are now saving at greater rates. Loan growth was 9.2% and savings growth was 5.9% in August 2018. Now savings growth has increased to 7.5%, Rick said.
Loan growth was slow for the $21 billion-asset BECU in Tukwila, Wash., last year but there was a significant increase in lending in the second quarter as interest rates fell, said Shahzad Kazi, the institution’s chief credit officer. Overall financial institutions in Washington state have seen loan growth from 9% to 10% over the last 12 months, which is above the national rate.
“I am assuming rates will remain low, with the Fed possibly making another cut in October,” Kazi said. “If interest rates remain low, I see the growth rate maintaining for at least the next six months.”
There have been some bright spots for credit unions in terms of lending. Since November 2018, mortgage interest rates have dropped from 4.8% to 3.6%, which has prompted consumers to refinance their mortgages, Rick said.
This activity has given a boost to Patelco Credit Union in Pleasanton, Calif.
“Our originations growth for this year is going to surpass 2018, powered by tremendous growth in the mortgage business given the refinance activity that picked up in May and June,” said Richard Wada, chief lending officer for the $7 billion-asset Patelco. “That tide has raised a lot of boats.”
The credit union has also done well with personal loans and auto loans by launching a new refinance program for these areas. Wada said Patelco is on track to double its portfolio on personal loans, allowing members to pay off high-interest-rate credit cards.
Preparing for a potential downturn
Credit unions need to be taking steps in case the economy slows, experts said. Larger fintechs are already doing this by tightening lending to higher risk customers, Patelco’s Wada said.
“So much of the risk is related to unemployment. If there is a slowdown, the effect is direct and immediate,” Wada said, adding CUs should consider being more conservative. “Don’t lend more to members who already are carrying a significant debt load.”
BECU constantly monitors the economy, GDP, unemployment, property prices and other leading indicators, Kazi said. If conditions slow down, the CU will tighten credit criteria to make fewer loans.
“If there is a recession, or a slowdown, then things will change,” Kazi said. “Typically expansion cycles are seven years. This one is 10 years, so many economists are predicting a slowdown in the second half of 2020. Sometimes you can trigger a slowdown just by talking about it, even though the fundamentals are fine.”
Patelco has guidelines in place so if it starts to stray from benchmark, it will know within 30 days if it needs to pull back, Wada said. On the collections front, the CU is stress testing its capacity so if volume increases 20% it can scale operations quickly.
“These are interesting times,” Wada said. “Everything has been so rosy for so long. This period of economic expansion has led to people not being ready for a downturn.”