Some experts are urging credit unions to keep a close eye on credit card balances as delinquencies rise and the threat of an economic downturn looms.
To be sure, credit unions don’t need to panic as the underlying fundamentals of credit card portfolios remain strong. Compared to banks, credit card loan volumes and delinquencies at credit unions are relatively modest. And what consumers spend on paying off debt is still below prerecession levels.
However, with the possibility of an economic slowdown later this year or next, credit unions need to exercise due diligence in issuing such credit to new members and monitor risk exposures, experts said.
Credit card loan volumes at credit unions have increased significantly over the last 13 years, according to data from CUNA Mutual Group. These loan balances totaled $61.5 billion in February, up 162% from February 2006, according to Steve Rick, CUNA Mutual’s chief economist. Rick added that credit card loan balances at credit unions have grown at an average annual rate of 7.6% over that time period.
But the pace of growth is slowing. From February 2017 to February 2018, balances were up almost 10%. That outpaces the 6.6% increase recorded from February 2018 to February 2019.
The lessening effect of tax reform, mixed consumer confidence, higher energy prices, December stock market volatility and the recent government shutdown have contributed to the slowdown, said Christopher D. Joy, a principal consultant with the credit card practice at Advisors Plus, a unit of the credit union service organization PSCU.
Still, credit unions are successfully taking market share away from banks and other lenders. Credit union’s credit card market share has reached an all-time high of 6.05% in February, according to data from the Federal Reserve Board.
“As credit unions have modernized products, increased rewards and become better at marketing, they present a solid alternative at better value than what the big banks offer,” Joy said.
Overall, credit quality remains strong for credit cards. Delinquencies for these portfolios remain relatively low.
“Over the past few years, the economy has recovered nicely, unemployment has been at historical lows and wages have grown for the first time in more than 25 years,” said Brian Turner, president and chief economist at Meridian Economics. “As a result, consumers have become more comfortable in spending money and taking on debt – even during a period of rising financing rates.”
Furthermore, Turner noted that consumer debt service payments as a percentage of disposable personal income is at 5.6%, below the 6% level just prior to the 2007-2008 recession.
“This suggests that consumer debt levels, including credit cards, are more manageable today than during the past five pre-recessionary periods,” he added.
However, there are some signs that credit card debt could be weakening. The delinquency rate on unsecured credit cards held by credit unions has increased from 0.94% to 1.35% in December 2018, according to Turner. Joy believes that rising credit card loan delinquencies has more to do with the post-recession lows experienced in 2012 to 2015 than a march toward problematic loan quality.
Turner cautions that credit unions should monitor receivable levels as interest rates continue to rise, and watch whether purchases continue to increase as the pace of economy growth starts to slow. All of this could lead to an increase in default risk exposure that would require credit unions to be diligent in identifying risks before extending credit in 2019 and 2020.
“This diligence requires the credit union to work proactively with delinquent borrowers to keep accounts current including establishing alternative payment arrangements, negotiating late fees and making small concessions to help the member get back on track,” Turner said.
To safe guard against this, Turner recommends that credit unions cap credit cards at no more than 6% of their total loans outstanding or 45% of net worth.
“I think that credit unions should put a definitive cap on unsecured loans, including credit cards, to protect against future loss when the U.S. economy indeed starts to slow sometime in mid- to late 2020 or 2021,” Turner said.
Joy warns that credit unions could see some uptick in delinquency and loss rates as lower growth unmasks underlying credit quality.
“Looking ahead, several economists are predicting a mild recession in latter 2020 and some large bank issuers are tightening approval and credit line increase criteria in advance of that possibility,” Joy added.
Karen F. Orie, CEO of Hampton Roads Educators’ Credit Union in Hampton, Va., said her credit union manages risk in its $3 million credit card portfolio by relying mostly on the reports that Visa produces daily. Management also utilizes internal reports created to help with managing lost and stolen cards.
In the event of an economic downturn, the $33 million-asset credit union can’t predict which credit card loans will go bad since anyone can face hardship in a weakening economy but the credit union tries to help where it can.
“When our members come into financial difficulties, we offer free financial counseling through a third-party as well as working with our members to determine how we can best help them, which also helps us” Orie said. “Our main goal is to eliminate the financial stress while creating a win/win solution for the member and the credit union.”
