Credit unions can’t protect the bottom line against coronavirus

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Credit unions are beginning to consider the ways the coronavirus may wreak havoc on the industry.

The U.S. has seen over 400 cases of COVID-19 across 34 states plus Washington, D.C., resulting in 19 deaths, according to data on Monday from the Centers for Disease Control. Experts have warned that the outbreak will continue to worsen in the U.S. This news has caused everything from volatility in the stock market to consumers flocking to buy hand sanitizer and toilet paper to the disruption of global supply chains.

Because of this, credit unions should brace for a potential hit to their bottom lines.

“You have some direct effects because of the economic slowdown from the lack of demand as consumers become nervous,” said Steven Reider, president of the consulting firm Bancography. “If we see people getting laid off and they stop going out to dinner to save money or don’t go on vacations or make big purchases, that can have a pretty quick and notable ripple effect.”

Consumer spending, rather than business investment, has driven much of the recent economic growth, sources said. Personal consumption expenditures were up 1.7% in January from a year earlier, according to the Bureau of Economic Analysis. This was partly driven by consumers spending on items such as food services and accommodations.

But fear of a pandemic could potentially cut into that spending. For instance, the Congressional Budget Office developed a report in 2005 on the potential effects of an avian flu pandemic that estimated that arts and entertainment spending would decline by 20% to 80% depending on the outbreak’s severity.

The same could be true for the coronavirus. Airline ticket sales in the U.S. are already down, and there’s a chance that the outbreak could affect attendance at industry conferences. This could spread to consumer spending in other areas, such as dining out, and eventually hurt small businesses’ ability to repay debt if they see a significant decline in revenue.

Richard Romero, president and CEO of Seattle Credit Union, said he expects some impact on lending in areas such as mortgages and noted that people deciding to stay in more could cause an economic slowdown that could eventually hurt businesses. For instance, Romero said that he decided not to take his two young children to their jiu jitsu lesson last week to limit potential exposure to the disease. Seattle is at the epicenter of the outbreak with a majority of deaths from the coronavirus being reported in King County where the city is located.

The credit union has also temporarily closed its headquarters because another tenent in the building was exposed to the virus.

“I can see that people might be reluctant to look at homes or decide they don’t want to list their home for sale and have people walk through it,” Romero said. “I could see that theoretically happening but it’s too early to say right now.”

Instead, right now Romero is mostly worried about the effect the Federal Reserve’s rate cut will have on the $832 million-asset credit union’s returns from its investment portfolio. He declined to give a specific number but said it would have a “very significant” impact on the institution.

The Fed’s emergency rate cut — it’s first in over a decade — of 50 basis points was meant to help calm flailing markets. But it also highlighted the central bank’s limited ability to stymie any economic effect from the coronavirus.

There are also few levers that the National Credit Union Administration can pull to help credit unions impacted by the disease. The Federal Financial Institutions Examination Council released an interagency statement last week on what institutions could do to ensure operations continue and keep employees and consumers safe.

Experts were mostly hopeful that NCUA would be lenient if credit unions adjust lending criteria to make emergency loans to members who lose income because of the outbreak or work with borrowers to adjust repayment plans. In a press release on Monday, NCUA, along with the other banking regulators, encouraged institutions to "meet the financial needs of customers and members affected by the coronavirus" and to "work constructively with borrowers." The release added that "prudent efforts that are consistent with safe and sound lending practices should not be subject to examiner criticism."

“During a crisis as it is happening, there is not a lot of things the agency can do or credit unions should expect them to do,” said Geoff Bacino, a former NCUA board member and partner at the consulting firm Bacino & Associates. “NCUA or any federal regulator that isn’t especially designed to help in a situation like this needs to be careful. Everyone has a role to play here. The key is that everyone understands the lane they need to stay in.”

NCUA didn’t respond to a request for comment.

However, it is possible that NCUA and other regulators will ask credit unions about their business continuity plans with a specific focus on handling a pandemic, and institutions should be prepared for that.

“Regulators tend to be more reactive than proactive,” said Ben Loveless, managing director at the consulting firm Sentinel Project Management. “You typically see them show up after the pandemic is over and look at your plan and say, ‘This isn’t good enough.’ The credit union then says, ‘Yes, we know it isn’t good enough now because we just went through the experience.’”

John Zmolek, CEO of Verity Credit Union in Seattle, said last week his biggest concern was that the coronavirus could send the economy tumbling into a recession. He said if the outbreak gets bad enough it could eventually affect his members’ ability to repay loans.

In the meantime, the $633 million-asset Verity is dusting off its pandemic plan it ensure that it can operate under difficult scenarios.

“In certain parts of the world whole communities have been isolated,” he added. “How would we handle that?”

Redwood Credit Union in Santa Rosa, Calif., has had more than its fair share of practice responding to natural disasters in recent years, including the 2017 California wildfires, said Chief Operating Officer Cynthia Negri. But because of those experiences, executives have been proactive in preparing for the coronavirus.

The $5 billion-asset institution has already gone through scenario planning with its entire executive team to see how it would handle different situations, such as a handful of employees becoming infected. The purpose of the exercise is to make sure the credit union could continue to serve its members without any disruptions in service.

“We stay very focused on what our role is in the community, and we know the main thing during a disaster is money and how to get to the ATM,” Negri said. “That’s a really important role we play — to be open and to be available for our community and members.”

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Coronavirus Lending Consumer lending Commercial lending Economy Interest rates Federal Reserve City of Seattle, WA NCUA