Thursday, August 28, 2008

Thrifts lose ground in economy, CUs well-positioned

MADISON, Wis. (8/28/08)--The U.S. thrift industry posted its second-largest quarterly loss on record, announced regulators Wednesday. Meanwhile, the credit union model is well-positioned for the struggling economy, says Steve Rick, senior economist at the Credit Union National Association (CUNA).

Thrifts, reeling from the housing crisis, lost $5.4 billion during second quarter, said the Office of Thrift Supervision (OTS). Only fourth-quarter 2007, when thrifts lost $8.8 billion, is higher in losses. They also set aside $14 billion--the most ever posted--to cover second-quarter loan losses, the agency said.

"Problem" thrifts grew--to 17 from 12 at the end of March, OTS said. The thrifts are among the 117 problem banks reported Tuesday by the Federal Deposit Insurance Corp.

"The credit union model--not-for-profit, member-owned, cooperative--is well-suited to ride out the current storm of falling home prices and a struggling economy, said Rick.

"Credit unions have seven key advantages over other financial institutions in today's turbulent financial marketplace," Rick said:

Most credit unions are very well-capitalized with the movement's average capital-to-asset ratio over 11%.

Most are reporting strong deposit growth, signaling that members have confidence in their credit union as a financial institution.

Credit unions are not hoarding liquidity as many banks that fund their balance sheet with short-term repos, commercial paper and interbanks lending are doing.

The typical credit union lending model of originating loans to hold them in portfolio is back in vogue, as compared with the alternative model of originating loans to sell them off into the secondary market is facing significant market turmoil, he said.

Banks are tightening their lending standards in the face of rising loan loss provisions. "Most credit unions retained sound underwriting policies over the last few years and therefore find it unnecessary to modify lending standards today. This is creating lending opportunities and faster loan growth at credit unions," Rick added.

Credit unions have much less credit risk exposure than other lenders, and hence lower loan loss provisions and higher return on assets.

As not-for-profit, member owned, cooperative financial institutions, credit unions do not face short-term earnings pressure that banks with stockholders who demand dividends may be facing.

"In the credit union world, we maximize service to members, not profits to stockholders. This allows credit unions to keep loan interest rates low, deposit interest rates high, and minimal fees to compete effectively in today's financial market environment," Rick said.

Credit unions are gaining market share and reporting positive earnings as banks and thrifts struggle, he said.

"Around 80% of credit unions reported positive earnings in the first half of the year, with an average return on assets of 0.52% compared to banks' 0.37%," he said. "Credit unions are not having to make the same kind of loan-loss provisioning as the banks and thrifts, and hence are reporting higher earnings."

Rick noted that credit union first-mortgage delinquency rates rose to 0.78% at the end of June, from 0.64% in December and the highest since 1993. "While the delinquency rate increase is not welcomed, it is still relatively low and quite manageable for most credit unions," he said.

Credit unions picked up market share in the second quarter as banks tightened their lending standards and households worried about the safety and soundness of their banking institution.

Credit union deposit balances rose 1.33% in the second quarter versus 0.08% for banks. Credit union lending also outpaced banks, with loan balances increasing 2.52% at credit unions and 0.06% at banks, Rick added.

courtesy of

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