WASHINGTON, D.C. -
CUEG members said they expect to see interest rates coming down this year, with a 25-basis-point cut to the key Federal Reserve target rate in 2007. Rates on longer duration investments are expected to recede fractionally, thus adding some steepness to the yield curve. The combination should mean a flat to slightly positive shape in the yield curve for the next two years, the group reported.
Dave Colby, CUNA Mutual Group's chief economist, noted that the housing sector continues to be soft at best and this has dampened economic growth. "With real estate loans contributing a substantial portion of credit union loan growth, the softening in housing may force credit unions to more aggressively pursue other lending opportunities. In total, we expect loan growth to slow in 2007."
While the CUEG forecast shows a modest downturn in employment this year, this is coming off a very strong position in 2006. Inflation, while above the Federal Reserve's target range, is forecast to dip in 2007 with less pressure from oil prices and modest income growth.
"Liquidity among credit unions seems to be growing noticeably faster than normal seasonal factors would suggest," said Bob Burrell, executive vice president/CIO of Western Corporate FCU (WesCorp), San Dimas, Calif. "Member balances are well ahead of our forecast. Many credit unions have rolled out aggressive CD campaigns, and loan growth seems to be slowing down in the three key areas-residential mortgages, vehicles and member business loans."
"Earnings compression among credit unions is expected to continue," noted Tun Wai, NAFCU's chief economist and director of research. "The flat to slightly positive yield curve for loans and investments, coupled with a rising cost of funds, will be a challenge for credit unions this year."
"The composition of savings has shifted to share certificates, indicating a member preference for higher returns," said Wai. "However, savings growth is still expected to be lower than loan growth in the near term," Wai added.
Kendrick Smith, vice president/CIO at Eastern Financial Florida Credit Union, Miramar, Fla., noted that the competition for checking accounts is fierce with incentives given for new accounts at many credit unions.
"The rising cost of funds and reductions in fee income and net interest margin will reduce return on assets (ROA)," said Smith. "We have also noted in the Southeast, credit unions have seen a decline in non-interest margins due to the growing concentration of certain loan products that have thin risk-adjusted margins and a continued erosion of core deposits due to changing interest rate sensitivities."
For info: www.cueg.org.
