Members Are Spending, And Savings Show It
Credit union deposits declined again in November, for the second month in a row and the sixth month in 2005, as American consumers continued to fund their spending sprees from savings. Members drained almost $3 billion from their credit union accounts in November, and almost $6 billion since the end of September, according to CUNA.
"Basically, total (credit union) savings are back to where they were at the end of March," said Bill Hampel, chief economist for CUNA, who expects full-year savings growth around 3%, the lowest on record.
The slow growth, just enough to keep up with inflation, comes soon after a period of unprecedented expansion when the credit union movement grew its deposits and assets by more than 35% for the three years 2001-2004.
Hampel cited two major trends affecting growth this year. "One is the consumer sector has been going on a spending spree for 11 years, creating a negative savings rate. People are spending more than they earn." In fact, data compiled by the Federal Reserve shows that consumers will spend more than they earn this year for the first time since 1933-at the height of the Great Depression.
Much of that spending was financed from the run-up in home values, just as an earlier spending spree was financed by a run-up in stock values, pointed out Hampel.
The second trend, according to Hampel, is that credit unions are continuing to keep their rates near all-time lows, discouraging new deposits.
For example, while the Fed has pushed rates up on money market accounts to 5%, credit unions have kept their money market rates around 1.9%-less than half the going rate. Rates paid on regular shares have also stayed historically low. The result is low savings growth, he said.
Figures compiled by DataTrac show that credit unions continue to pay an average of just 0.8% on regular share accounts, just above the record low of 0.73% paid last year. It's hard to attract new deposits at those rates. Credit unions have been attracting some longer term funds by boosting CD rates, but apparently not enough to compete with other investment options.
Hampel worries that many credit union CEOs are too concerned with maintaining high return-on-average assets, and that's why they keep their rates so low. Through the first three quarters average ROA for credit unions was 0.93%, historically high. That figure is expected to hold for the whole year, according to Hampel.
But higher ROAs translate into lower returns to members, argues Hampel, who has been urging CEOs for years to accept lower profitability to provide greater returns to members. Many credit unions operate quite well with ROAs of 0.70% or 0.80%, he noted.
Higher Net Capital
The lower growth has had other predictable affects on credit union balance sheets. One is a higher net capital ratio, even with lower earnings than in previous years. At the end of November, the net capital ratio for credit unions hit 11.2%, one of the highest in years. Hampel also argues that CEOs should be comfortable with lower net capital, paying out more of their retained earnings to members. "After all," he said, "what's the minimum under PCA, 7%?"
On the other side of the balance sheet, credit unions had a strong year in lending, with 10.5% through November and a projected 12% for the full year. That would be the best year for loan growth in at least five years. Credit unions continued to report strong growth in 2005 in mortgage lending and in auto lending.
The higher loan growth has pushed up the traditional liquidity indicator, the loan-to-share ratio, to 80%, the highest since 1979. But Hampel also noted that there is still adequate liquidity in the credit union system to fund loan demand.