Analysis Sees Moderately Improved 2005 For CUs

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Credit unions can expect marginally improved share growth and moderate loan growth in 2005, according to a new report that is slightly more upbeat than a similar report from the same group one quarter earlier.

In its just-released 2005 Consensus Forecast, the Credit Union Economics Group (CUEG) is forecasting an annual Gross Domestic Product (GDP) growth rate of 3.8% in 2005, an increase from its prior 2005 forecast (3.7%) made in the previous quarter. With the government's advanced estimate showing the economy grew 4.4% in 2004, the CUEG said it expects 2005 to experience a healthy annual growth.

"CUEG expects employment gains to be just adequate enough to hold unemployment at 5.2%," said Tun Wai, NAFCU's Director of Research and Chief Economist, and a CUEG member. "Credit unions can also expect further flattening of the yield curve as the Fed Fund rate climbs to 3.7% by year-end, while 30-year, fixed-rate mortgages move up to 6.5%."

NAFCU's Senior Economist Jeff Taylor noted that the consensus view for CPI inflation is under 2.8%. While the core inflation rate - excluding the volatile food and energy components - may climb to near 3%, we expect some declines in energy prices to dampen the overall inflation rate," said Taylor.

Dave Colby, CUNA Mutual Group's Chief Economist, said the economic environment envisioned by CUEG members should produce marginally improved share growth of just over 6% in 2005. "Share growth has pretty much stalled since last June. Credit unions have lagged the broader capital markets in raising deposit yields as a means to keep the cost of funds down, but in return, we are seeing stagnant deposit inflows," Colby said. "On the present course, some credit unions may experience some liquidity problems."

CUEG does not expect loan growth to keep pace with the 10%-plus rate in 2004, but it does anticipate growth above 9%, with home equity loans being the primary growth driver in 2005.

"Credit unions will be challenged in 2005 to keep a balance between the need to hold their cost of funds low and adequate liquidity," said Scott Mainwaring, CEO of Vystar Financial Group of Jacksonville, Fla. And he added a warning:

Keeping deposit yields so low that it causes a net deposit outflow, implies members are establishing new relationships with credit union competitors."

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