An ongoing soft housing market rocked by the aftershocks of sub-prime lending, coupled with continually rising energy prices add up to an economy teetering on the edge of recession. But even though economic growth has slowed considerably, credit unions on solid financial footing shouldn’t fear a downturn, according to Dave Colby, chief economist for CUNA Mutual Group. But the risks remain, with an economic curve weighted heavily on the downside, suggesting that credit unions – and everyone else, for that matter - proceed with caution.

            Credit union savings and lending continue to grow, albeit at a slower rate, Colby notes in the January 2008 Credit Union Trends Report, published by CUNA Mutual. Real estate loans, to a large degree, continue to fuel growth in most credit unions’ loan portfolios, while automobile and other consumer loans contributed a significantly smaller portion of gains, signaling a growing conservatism among consumer borrowers.

            “Year-over-year loan growth was solid at 7.3%, but is forecast to recede further by year-end and into 2008,” Colby writes in the January report, which draws its conclusions from November 2007 data. “The economic slowdown will cause consumer spending/borrowing retrenchment and competition will intensify for the smaller pool of borrowers.”

            The already weak housing market will further dampen economic activity in the coming months and year, the report predicts. “The continued downturn in the housing and housing finance sector has more downside room to run,” Colby predicts.

            Despite the bleak outlook, the economist says that credit unions have seen continued growth on the savings as well as the lending side, with aggregate industry activity indicating a 6.3% growth in the former to balance the 7.3% growth in the later. Of that 7.3% loan growth, the majority remains in the real estate secured portfolios, with just 0.9% growth in vehicular loans for credit unions nationwide.

            “Looking at the broader new-vehicle sales market, we see some signs of continued stress with almost all indicators pointing to weaker new vehicle sales volumes through 2008,” Colby says. “We believe both higher payoffs and weak origination are driving this trend.”

            Further indices point to consumers who are becoming increasingly wary about incurring additional debt, the report maintains. Colby suggests that credit unions will have trouble growing their loan portfolio by more than 5% well into 2009.

            Despite the economic conditions, however, credit union key indicators show the industry to be in good position to weather the storm. The industry’s capital-to-asset ratio is at its second highest level ever at 11.5%, delinquencies are low, but rising, and the loan-to-share ratio (83.6%) is very healthy.

            “Looking at the current results of key ratios in a historical context, we see collectively credit unions are in excellent shape,” Colby writes. “Given that we have entered into a period of economic weakness with higher downside risks due to significant credit and housing sector corrections, it’s nice to begin from a position of strength.”

For more detailed information and a complete copy of the latest Credit Union Trends Report, go to www.cunamutual.com. In the “For Credit Union Staff” section, click on “My Services,” then look for the box labeled “News & Events.”

           

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© CUNA Mutual Group 2008.  Used with permission.

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