With the Fed finally raising rates after years of keeping them near zero, credit unions could begin to see their annual loan growth slowing down in the next few years – but one analyst says the fall-off won’t be that drastic.
That’s the word from Robert Larson, financial consultant at CUNA Mutual Group, who spoke during the group’s recent Online Discovery Conference. With CUNA Mutual forecasting credit union growth rates to slide from double digits – where they have been each year since 2014 – to 9 percent this year and then further down in coming years as the Fed continues to raise rates, CU lenders will have to find ways to pick up some yield on their loan portfolios.
“Your average loan life is 30 months,” said Larson. “But when you see that rates did not rise from basically 2008 to 2015, your portfolio flipped over almost three times. This means that yours loans continue to reprice at a lower rate.”
Consequently, he explained, the average yield on the loan portfolio in the credit union industry bottomed out in 2016 -- that is to say -- it did not increase, stayed at the same level in 2017, and we did not see the first increase in the yield until the first quarter of 2018.
Larson sees some opportunity here for credit unions in a rising rate environment – i.e., credit union asset and liability management committees should make plans for repricing their loan portfolios dependent upon what action the Fed takes at its scheduled meetings. “Then when the Fed releases its policy decision, the credit union can act instantly in order to maximize yield, returns or net interest margins” he said.
He noted that historically when the Fed has raised rates, loan growth continued at credit unions, but said this makes sense because borrowers were taking advantage of lower rates with the expectation that rates will keep rising. “If you wait till rates go up, you might not be able to afford that car or house you want,” he said. “This way, you increase your buying power.”
Auto loans should particularly do well for credit unions during a rising rate climate because they tend to reprice faster than, say, first mortgage loans.
One must also consider long-term rates (which the Fed, of course, cannot control) and their relationship to short-term rates.
Credit unions, Larson noted, do very well when the yield curve is steep, which means the difference between short-term and long-term rates is widening.
“Our deposits tend to be priced to the low side of the yield curve, while loans are priced at the higher end of the yield curve,” he said. “Now, with little fear of inflation, as short-term rates increase, longer-term rates are not rising as fast.”
Some credit unions, in order to increase loan volumes, may have to consider lowering their loan rates – especially in the face of competition from an increasingly crowded lending marketplace.
In addition, credit unions need to weigh the fact that as longer-term rates rise, consumer loan demand falls, consumer prepayment and refinance activity slows down and loan demand may shift to different types of loans, and act accordingly.
For example, during a rising rate environment, it would be a good idea to introduce credit cards with a variable rate product, as it will allow the credit union to pick up additional yield.
With respect to auto loans, Larson noted that credit unions have about 30 percent (by balance, not volume) of the market, having risen from about 22 percent in 2011.
“Of that 30 percent share that credit unions have, about 58 percent is through indirect lending,” he said. “The member wants the car, not the loan.”
How can credit unions increase this overall market share? Larson suggests by continuing to offer attractive rates, compared to banks.
Larson cited that, based on a national average as of late 2017, CU rates on a 36-month used auto loan were more than two percentage points lower than those of banks, while the rate for a 60-month new car loan was slightly less than two points lower.
“Over the life of these loans, borrowers save hundreds of dollars by using a credit union rather than a bank,” he said. “This is why an auto loan recapture program is so important for credit unions. We just have to tell our story about this advantage.”
