MADISON, Wis.-Moving into 2013's second, half David Colby sees credit unions with a variety of options available to spur growth.
Colby, chief economist for CUNA Mutual Group, told Credit Union Journal the "No. 1 story" in the CU community is the loan-to-asset ratio. That ratio, currently at 57.1%, is down approximately 13 percentage points from October 2008 and is the lowest it has been since July 1994.
"So just since October 2008 credit unions have 13 percentage points of lousy investment earnings instead of loan earnings," he said. "Credit unions need to do everything they can to change that number, both the numerator and denominator, but obviously getting loans higher would be the best."
The "good news," according to Colby, is that lending grew at CUs 5.2% from March 2012 to March 2013.
One loan driver, said Colby, is anecdotal evidence shared by a number of credit unions that are booking mortgages with low loan-to-value and short duration. Typically, CUs are finding members who have 15 or 20 years left on their mortgage at 6.5%. With mortgage rates so low today, CUs can do a 10-year or 15-year loan at a low rate, lower the payment for the member, and have a near-zero default risk, because these homeowners have a substantial amount invested in their houses.
A View On 'Demand'
On autos, Colby said despite the talk about pent-up demand, he believes there really is only "replacement demand." He said the used auto market is not as good, because there is not a good quantity of low-mileage vehicles.
"Some manufacturers are easing up on subsidized financing, so credit unions are seeing more new car loans," he reported. "As long as there is no disruption to auto sales, there will be less and less 0% financing competition as sales go up."
Meanwhile, credit cards are an "amazing story," according to Colby, because credit unions have continued to grow their portfolioes while the rest of the market has not. The rest of the market is still $209 billion below the December 2008 peak. Over that same period, CU credit cards are up 18%. Colby said CU should be "pushing" their credit cards to members as a cashflow savings tool.
IRR Fears Exaggerated
A key concern for many CFOs is the direction of rates and related risk.
"I do not see interest rates going up in an appreciable manner in the next 12 to 18 months," Colby declared. His reasoning: if rates rise significantly government debt service at the state, local and national levels would cause mass layoffs.
"The Fed has done a tremendous job of keeping rates low, so I thing there really is no reason to rush to get mortgages off the books and take that money to the corporate. With all that said, when rates do go up-perhaps in 2015, when the Fed takes its foot off the gas-how many credit union leaders remember how to manage in a rising interest rate environment?"
According to Colby, the way to get the economy rolling again is for CUs to find cashflow for their members. He said credit unions have done a "great job" with loan savings challenges, getting members to switch loans over at a better rate and saving them millions of dollars in payments.
"This is an example of stimulating a recovery in their local area, and if the loans were stolen from banks and finance companies, even better."
CUs should not ignore what Colby sees as a "tremendous market" in the recently credit impaired. These are people who were in good financial shape for years until the recession hit. Many experienced a job loss, missed loan payments and took a hit to their credit scores, but he said if they are employed again they are a better risk than the numbers indicate.
Go Beyond The Score
"I spoke to a credit union that said these people are the best word-of-mouth advertisers ever. GMAC used to rate people on their auto-only payments. Credit unions need to go beyond the credit score and really look into the file," he related. "This is another way of getting the community back on its feet."
Colby offered one other observation, which is to leverage CUNA's launch of its grassroots outreach campaign, "Don't Tax My Credit Union" campaign.
"As long as credit unions are asking their members to do something, they should ask if they have a loan somewhere else they can bring to the credit union."
