Are Credit Unions over extended; Again? Impressive loan growth, Alarming deposit growth

Visualize key metrics for quicker, better decision-making

Increasing loan growth

After the sub-prime crisis, loan growth for credit unions started declining and in 2010 and 2011 the growth was negative i.e. more loans were paid off as compared to loan originations. Loan growth gained momentum in late 2011 and it has been increasing since then. As per NCUAQ3 2018 data, total loans for credit unions combined has reached $1.04T with a growth rate of 9.5% YoY., this includes $24.3B of loans of just the last quarter. The year-over-year loan growth rate for the credit unions has been over 9% for the last 4 years. Highest growth has been observed in auto loans, followed by unsecured credit card loans. The growth rate for Auto loans has been in double-digits for 6 consecutive years.

Deepening member relationships

Along with increase in loans balances, credit unions are performing well on the front of strengthening relationships with their members too. Today credit unions serve more than 116 million members across the U.S., increasing at an average growth rate of around 4% for the last 2 years. Average relationship size per member with credit unions has reached $19k of which 45% comes from loans. For credit unions with an asset size of more than $1B, average relationship per member has crossed the mark of $20K and loan relationship per member is more than $10k. Credit unions have deepened the extent of their relationships with members in not only in auto loans segment but mortgage loans and credit card loans with increasing growths rate year over year.

Falling growth rate in shares

One side we are observing a continuous increase in loan growth rates and on the other the growth rate for deposit shares is slowing down. The increased competition in deposit interest rate offering and the desire to earn more returns, is driving members to prefer interest-bearing deposits like share certificate. The only share product with increasing growth rate is share certificates, and for all other products the growth rate has been on a decline as compared to prior years. Net liquidity change, which is calculated as the change in deposit and change in loans, has been negative for the last 6 quarters and has further declined in the recent quarter increasing the difference to $23B. Apart from net liquidity, another good measure of a credit union`s liquidity is Loan-to-Share Ratio. In Q3 2018, for all credit unions nationwide, average loan-to-share ratio is 85.63%. This is the highest rate reported till date.

Based on the economic and credit union forecast report published by CUNA, the loan-to-share ratio is expected to be as high as 87% in early 2019 due to loan growth exceeding deposit growth. This will be the highest value of the ratio since the sub-prime crisis. An increasing loan-to-share ratio, in turn impacts the liquidity of the credit union and this may contribute to economic slowdown reducing the loan growth in the upcoming year. Hence, key focus areas for credit unions while strategy planning for 2019 should be:

  • Improve member experience, and offerings
  • Increase penetration into younger generation
  • Identify right deposit mix for your credit union