Credit unions enjoyed solid lending growth in 2016, extending a multiyear run fueled by strong consumer demand for credit.
Most of the factors behind that solid demand — low interest rates, falling national unemployment and modest economic growth — are still largely intact. But shifting expectations about interest rates coupled with uncertainty on the regulatory and financial policy front as a new administration takes office are clouding the outlook for 2017.
So, how will loans at credit unions fare this year?
Economic factors remain largely positive, many in the industry say. Brian Turner, president and chief economist at Meridian Economics LLC in Plano, Texas, sees the economic outlook as "slightly more positive" than in the past two years. Average wage growth, he noted, has accelerated over the past couple of quarters, the first time in many years, and job-creation continues.
Those gains have solidified the view that the Federal Reserve will be pushing interest rates higher in 2017. Turner said credit unions that retained strong liquidity will benefit the most in a rising rate environment during 2017 and 2018. "The impact on [return on assets] for most credit unions from the anticipated rise in the Fed Funds rate on cash is comparable to a 4% to 5% increase in vehicle loans -- but without taking on the credit risk," he said.
However, higher rates could bring their own challenges. While lenders of all stripes are looking forward to the possibility of originating loans at higher rates, the shift won't be riskless, said Aaron Bresko, vice president of indirect lending and consumer underwriting at Boeing Employees Credit Union, a $15.7-billion institution based in Tukwila, Wash.
For one thing, there are already signs that consumer demand for mortgage refinancing and other types of credit is ebbing.
Bresko noted that higher rates are also likely to attract increased competition from large banks and nonbanks that may have been reluctant to pursue certain categories of lending while margin opportunities were depressed. Loosening of regulation would only add to that potential for new competition, observers said.
Issa Stephan, president and CEO of First Financial Federal Credit Union, a $183-million institution based in Freehold, N.J., said that some credit unions are likely to see a plateau in loans related to big-ticket items — boats, new cars — after strong sales the past few years.
Stephan and Turner both predicted that credit unions seeking growth would have to decide whether to move out on the credit risk spectrum to pursue borrowers other than prime.
Jim Block, SVP and chief lending officer of Baxter Credit Union, a $2.6-billion institution based in Vernon Hills, Ill., concurred. One of the main challenges facing credit unions with respect to loan growth will be linked to "transitioning organizations from refi driven mortgage originations to purchases and maintaining auto loan growth trajectory while auto sales plateau," he said.
Another potential avenue for growth should consumer demand slacken, is member business loans, said Paul Kirkbride, SVP CU Solutions at CU Direct. "Many small businesses have not been well-served by their lenders and I think credit unions should expand their presence here," he said.
"There is great upside in these loans with higher rates of return – and it's a great strategic idea to establish relationships with local businesses," Kirkbride said.
One additional point of uncertainty, regardless of the economic outlook, has to do with scale. Over the past few years, Turner pointed out, the increase in industry loan demand has been isolated to larger credit unions (those with assets of at least $500-million).
"Roughly 91% of the industry (in terms of numbers) collectively experienced a modest 1.8% growth in loans," he said. "Moreover, credit unions less than $100 million in assets (73% of the industry) collectively experienced a 3.5% decline in loans.
