Nearly five years after the housing bubble burst and the financial system collapsed, politicians are still clamoring for new ways to free up capital and spark growth across the country. The most recent effort, put forth by Sen. Mark Udall, proposes to increase the lending limit of credit unions from the current level of 12.25% of assets to 27.5%.
In light of what might become a credit union renaissance, IBISWorld has identified the top 10 industries that would most benefit from increased credit union lending capabilities and categorized these industries using its proprietary risk rating. IBISWorld uses multiple factors, including industry drivers, revenue projections and life cycle stages, to estimate risk, which reflects the level of difficulty a company encounters within its industry.
With increased funding for Medicare and Medicaid expected in 2012 and an aging population, it is not surprising that two of the four industries identified as posing low risk to credit unions are in the health care sector.
Both generic pharmaceutical and wound-care product manufacturing are expected to grow significantly over the next five years, at annualized rates of 6.3% and 7.3%, respectively. Unlike other high-growth industries, these two pose little risk because demand for health care is set to increase over the period due to the growing median population age and increased government funding. The demand for wound-care products has also been driven by a rise in chronic conditions, such as diabetes and obesity that often necessitate the regular use of these products. On the other hand, demand for generic pharmaceutical products is set to rise as brand-name manufacturers lose drug patents over the next five years, presenting companies with the significant opportunity of manufacturing several more popular drugs.
Outside of health care, IBISWorld has identified light-emitting diode manufacturing and Internet publishing and broadcasting as high-growth industries with limited exposure to risk for credit unions. Growing demand for eco-friendly products will drive LED manufacturing in the five years to 2017. Downstream industries and consumers both have accepted the use of LEDs in place of traditional bulbs, which makes their dominance of mainstream consumer products inevitable. As a result, the industry is expected to grow at an annualized rate of 3.4% over the next five years. Similarly, demand has increased for Internet publishing and broadcasting, especially with the rapid development of mobile technology. IBISWorld expects the explosive growth of mobile internet functions to boost industry revenue at an annualized rate of 16.2% over the next five years, making it the industry with the lowest risk.
According to IBISWorld estimates, the satellite television providers, wireless telecommunications carriers and Internet service providers industries present a medium level of risk to credit unions. Although these industries are expected to display healthy growth over the next five years, they will also face more significant impediments to that growth. For example, satellite television providers face substantial internal and external competition because their products can be easily replaced with less expensive or more entertaining substitutes, such as services from Hulu and Netflix. Wireless telecommunications carriers also face significant threats from several substitutes. In the five years, these three industries are each expected to average about 3.9% annual revenue growth.
Industries that IBISWorld has identified as having high risk for credit unions include wind power, wind turbine manufacturing and hybrid and electric vehicle manufacturing. All three industries are currently in the growth phase of their life cycles with respective average annual growth rates of 8.4%, 2.5% and 6.3% forecast for the five years to 2017. Each of these industries is highly susceptible to swift changes in federal funding and regulation. For example, both wind power and hybrid and electric vehicle manufacturing rely heavily on tax credits that make technological development more feasible and distribution more affordable for consumers.
Additionally, these three industries face a high level of consumer substitution. For example, many consumers still purchase standard gas-engine vehicles over electric vehicles because there is not widespread access to charging terminals in comparison to gasoline stations. Overall, the technologies these three industries are developing are young relative to the other seven industries in this report, which makes them a far riskier opportunity.
With nearly 500 of a total 7,200 credit unions nearing the current limit of 12.25%, Sen. Udall’s legislation would certainly provide the industry with an opportunity to shift its focus to small-business lending. Commercial banks would retain most of their high-value lending business, but would likely lose many medium-size borrowers.
Although community banks would suffer, their deep regional roots would help them retain more of their business than commercial banks. As a result, IBISWorld projects the credit union industry's revenue to increase 5% per year on average through 2017, up from the 3.1% annualized growth that was previously forecast over the five-year period. If the lending capabilities of credit unions expand, many other industries that have struggled to secure loans from traditional banks could finally secure funding to aid their own growth.
Eben Jose is an analyst at IBISWorld
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