Loan Growth Subject to Qualifiers: NCUA
According to most economic indicators, credit union loans are on the upswing. In this case, the rising tide of loan demand raises most boats, with a few sectors still swamped for various reasons.
Despite industry cautions to the contrary, the NCUA is supportive of the increases for credit unions with sound lending practices.
“(The) NCUA doesn’t have an issue with loan growth,” NCUA Chief Economist John Worth said. “Credit unions need to adhere to sound underwriting standards and be mindful of diversification, liquidity and interest rate risk considerations.”
Consumer loans seem to making the fastest strides, helping credit unions increase short-term assets on their balance sheets. Total loans grew an average of 8.8% between first quarter 2013 and first quarter 2014, the fastest growth in loans since before the 2008 recession, Worth said. Auto loans and credit cards are driving the upsurge, clear indications of increasing consumer confidence, the chief economist added.
However, not all sectors are performing at the same levels. Long-term real estate loans are slowing their decline, which still indicates progress of a sort, Worth said.
“While the stock of mortgages on balance sheets grew by 6.8% since last year, there was a sharp drop-off in new originations compared to the last several years,” Worth said. “This drop-off to just over $21 billion for first quarter 2014, compared to nearly $40 billion in first quarter 2013, reflects broader market forces."
“Nevertheless, this slowdown was reflected in a drop in non-interest income in first quarter 2014, which we partially attribute to lower fees from mortgage originations,” Worth added.
Large credit unions are having better luck riding the lending wave than smaller credit unions, some of which have seen their loan portfolios contract. In fact, credit unions with more than $1 billion in assets saw their portfolios expand an average of 12.8% since first quarter 2013, a bounty that hasn’t been experienced by their smaller counterparts.
“This is indicative of the overall performance gap between large and small credit unions, and there are a number of drivers, including demographics, field-of-membership issues, economies of scale and others,” Worth said. “Small credit unions are naturally impacted by economy of scale issues. As such, forming strategic alliances with other credit unions and CUSOs and doing loan participations are ways they can overcome some of their size limitations.”
Despite some positive trends, credit unions are still uncertain about loan growth due to mounting consumer debt and a still-stumbling housing market.
NCUA’s pending risk-based capital rule also is causing anxiety, and could significantly influence the way some credit unions operate, depending on how the final rule is written. Worth dismissed the rule’s effect.
“RBC, which is still in the proposal stage, is not about trying to get credit unions to stop taking risks,” Worth said. “It is about making sure that capital is commensurate with the assets on their balance sheets. There are no bright lines.”
Good lending practices will be required no matter what the final rules says, according to the chief economist. How credit unions balance their portfolios will determine their overall success.
“Concentration risk is an important consideration, as is managed growth for products that are complex or new to a credit union,” Worth said. “Ultimately, the real constraint on growth is net worth, and a credit union should not hold more assets, loans or investments than its capital reserves can support.”