Updated Forecast: 2011 To Look A Lot Like 2010

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MADISON, Wis.-Credit unions should expect the rest of 2011 to continue to be as challenging as 2010.

That's the word from Dave Colby, CUNA Mutual's chief economist, who offered that forecast during the company's first Discovery Webinar of 2011. And Colby's outlook was backed by those in attendance. A poll of 1,100 registrants showed that while a number of economic indicators, such as the stock market and consumer sentiment point to recovery, 82% of CU leaders believe the recession-and CU problems-are far from over.

According to Colby, that thinking is wise, and CUs should be cautiously optimistic. "2010 was a year of managed growth and I expect 2011 will be the same."

The fact the housing crisis remains ongoing and job growth remains slow-especially compared with the previous recession-also point to continued difficulties for financial institutions, Colby stated. Add in high energy prices and continuing credit market uncertainty, and "We are not out of the woods yet."

Colby noted that the economy and credit unions achieved some recovery in 2010, including capital growth and net-worth ratio improvement, but warned credit unions will face many risk factors. With consumers continuing to deleverage debt, lending is the biggest concern, said Colby, who expressed consternation over the fact auto sales are up to start the year but credit unions are not seeing the results in their auto loan portfolios.

"Much of the business here is going to captive financing."

Colby said CUs' ability to grow near term will depend in large part on their ability to reignite lending. "But they must do this carefully. That is critical today. Credit unions must avoid mistakes."

All the risks to credit unions go directly to the bottom line and adversely impact their ability to replenish capital, Colby said. He cited near-term risks that include the likelihood of rising compliance costs and the yet-to-be-written rules coming out of the Financial Reform Act.

Other headwinds: regulatory caps on income (debit interchange, NSF/courtesy pay) and rising compliance burdens that will continue to slow bottom-line growth. Overall, Colby predicted credit unions will manage to a 10% to 10.1% capital-to-asset ratio over the next four years.

"Going forward, I think credit unions will be in a balance between asset growth and bottom-line growth," shared Colby. "Asset growth isn't going to be robust, but it will be more difficult going forward to grow the bottom line as we see margins compress."

What will help lift credit unions are decreasing delinquencies and falling unemployment. "If credit unions were able to retain a lot of the mortgages they are originating, and not sell them off due to interest rate risk, then the delinquency rate would go down much faster. So this is positive news for credit quality."

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