Loan Share To Be More Critical

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WASHINGTON — With a continued slow recovery and no signs of a bounce-back in lending, credit unions' number one job in 2011 will be to find ways to gain greater share of their current members' loan business.

According to CUNA Chief Economist Bill Hampel, organic demand for loans by the household sector will be weak. "As we know, loans are incredibly important for credit union earnings because short-term investments pay almost nothing. For credit unions to have a really good year they will have to go against the grain and get good loan volume."

With consumers continuing to deleverage, the only effective way for credit unions to grow loans is to gain a greater percentage of their members' business, getting them to bring over existing loans and encouraging them to think of the credit union as their primary financial institution. "Credit unions will need to encourage members to think of the credit union first for their ongoing borrowing needs," Hampel said.

Hampel acknowledged that won't be easy, but would be impossible if credit unions held a large share of their members' loan business. "If we had 90% of our members' loans and they are cutting back on borrowing there would be nothing we can do. But we have only 45% of their loan business, and we have to get more of it. I'm not sure how credit unions do this. But this is the opportunity they have."

What will continue to make lending challenging is slow GDP growth (2.5% to 3% in 2011), held back by the household sector being in the "early to middle stages of a pretty substantial deleveraging. Our forecast for loan growth this year is 4%," Hampel said.

Savings will grow at 6%, one percentage point above 2010 but well below 2009 levels, according to CUNA. What will keep deposits from growing much is that many consumers will continue to direct extra funds toward paying down debt instead of placing money in savings vehicles paying often 50 basis points, Hampel said.

ROA is expected to go up to 60 basis points after assessments, which Hampel expects will come in at around 15 basis points in total (5 for the NCUSIF and 10 for corporates). "With longer-term interest rates rising just a little bit, there will be a little more yield on loans next year, and loan losses will continue to decline."

Overall, Hampel said CUNA is calling for a slow recovery with a greater chance the economy will outperform than slide back to a double-dip recession.

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