As ROA Slides, CUs Should Set Aside Net Income Goals, Focus On Growth
Two noted credit union economists said CUs can expect the second half of 2005 to bring decent loan growth, weaker savings growth, downward pressure on earnings and a modest rise in net worth ratios.
Dr. James Likens, president and dean of Western CUNA Management School, and Dr. Bill Hampel, chief economist for CUNA & Affiliates, delivered the economic outlook for credit unions at WesCorp's Future Forum conference here. Likens and Hampel said credit unions should watch for slowing growth in the U.S. economy and an uncertain interest rate environment.
They also demonstrated that even economists have a sense of humor.
"The bad thing about the future is no one knows where it's going," quipped Likens. Later, while discussing possible interest rate scenarios, he declared, "I don't know where interest rates are going. And if I did, I wouldn't tell you!"
Hampel also drew a chuckle when he turned to the 10-year Treasury Rate, which has remained stubbornly close to 4% despite the Federal Funds Rate rising to 3% from 1% in recent months.
"The 10-year rate was down to 4.02 as of this morning [May 25]. This is bad news, because I am closing a mortgage in one month and I wasted money locking in a rate a month ago. This is personal now."
Interest Rate Picture Cloudy
On a serious note, Likens said the three-month and 10-year interest rates are important because the former is a credit union's cost of funds, while the latter predicts ROA (return on assets).
After gathering predictions from numerous economists, he said the three-month rate is expected to range from 3.0% to 3.4% in 2005, with an average prediction of 3.2%. In 2006, estimates vary from 3.4% to 4.6%, with an average of 4.1%. Expectations for the 10-year rate fall between 4.4% and 4.9% in 2005, with an average of 4.6%. In 2006, economists foresee a rate of 4.5% to 5.7%, an average of 5.2%.
ROA has declined three consecutive years, and Likens expects this trend to continue. In 2002, ROA was 1.08, followed by 1.01 in 2003 and .92 in 2004. Likens predicts ROA of .82 in 2005 and just .70 in 2006. "This is depressing," he declared.
Hampel said the biggest risk to long-term rates would be a significant revaluation of China's currency. He said rates would rise because such an action "removes a big purchaser of bonds."
Hampel said he expects the U.S. gross domestic product growth rate to slow in 2005 and 2006, but he does not forecast a recession.
"With the slower or weaker economy, the ratio of net income to average assets will decline. External forces are driving the numbers down, but credit unions will not let the numbers go too low."
"Net income in and of itself has become a goal for credit unions, and it shouldn't be," Hampel continued. "Credit unions should set aside their net income goals and concentrate on growing fast."
Hampel applauded the Credit Union Regulatory Improvements Act, also known as CURIA. He said CUs would benefit from raising the member business lending cap to 20% from 12.25% of assets, and from substantial PCA (Prompt Corrective Action) reform.
"Those are the two really important things," he assessed.