Caution Urged As Loan Growth Continues To Slow

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An analysis of credit union economic performance for the first four months of the year has found concerns over slow growth in lending and dim prospects that the trend will reverse. The same analysis also suggests that credit unions cold do a better job maximizing investment returns.

In its Trends Report, CUNA Mutual said that while total loans are up 10.2% over the past year, current results are not as favorable. "YTD, the total loan portfolio is up just 1.1%, and over 100% of the gains were derived from real estate-secured lending," CUNA Mutual noted, adding that annual real estate growth remains very healthy with a 2.4% YTD increase supporting annual growth of 15.5%.

But the company's economists found that consumer installment credit (CUCIC), which is primarily vehicle, unsecured and credit card loans, is down YTD and annual gains have fallen to just under 4%. "While relatively small (3.4% of all CU loans), member business loans are up $4.9 billion or almost 50% over the past year," it said.

CUNA Mutual is forecasting that loan growth will slow to under 8% by the end of the year as rising interest rates reduce mortgage demand and automaker financing incentives re-emerge stronger than ever. "Expect loan portfolio gains to slip below 7% in 2006," the company said.

On the deposit side, at $225.3 billion, surplus funds at CUs are up 4.4% ($9.5 billion) YTD, as first quarter inflows were stronger and loan demand was off due to seasonal factors, the company reported. Currently, 33% of all assets are in surplus funds, down from 36% in March 2004.

"Over the past year, surplus funds were down $6.3 billion (2.7%)," the analysis stated. "This reflects loan portfolio increases in excess of asset growth and a rising loan-to-share ratio. Looking at relative size, surplus funds equal 52% of total loans. Given all the work we put into growing loans, shouldn't we pay at least half as much attention to maximizing investment returns? In an era where every basis point is critical, a greater focus on boosting the returns on one third of all assets will offset some lending spread compression and help preserve ROAs from eroding further."

CUNA Mutual said that despite savings and asset growth in excess of 2.5% in the first quarter, annual growth remains tepid. Weak deposit inflows can be attributed to low deposit yields and an overall lack of consumer savings (latest reported consumer savings rate has fallen to 0.6% of disposable income). CUs continue to hold down their cost of funds, CUNA Mutual observed, as they are slow to raise deposit yields. Between late June 2004 and the end of March 2005, the Fed raised its key target rate by 175 BPs. Over the same period, CUs have raised yields on share drafts and regular shares by three and eight basis points, respectively.

"As long as this money remains rate insensitive, CUs will continue this strategy to boost spread earnings," said CUNA Mutual.

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