E-Scan: Brace for recession aftershocks

MADISON, Wis. (5/15/09)--While there are some indications the recession has hit bottom, credit unions should prepare for a few aftershocks in what could be a slow road to recovery, advises the Credit Union National Association's (CUNA) 2009-2010 Credit Union Environmental Scan (E-Scan).

The recession topped this year's list of Top 10 E-Scan Insights, which identifies the key trends and challenges affecting credit unions in the coming years. Credit unions use the E-Scan as a source of issues and trends affecting the financial services industry and to prepare for strategic planning sessions, budgeting, product development and new initiatives.

The top insights, as identified by E-Scan analysts:

Recession--Evidence is building that indicates the economy, while a long way from recovery, might have hit bottom. Credit unions are well-positioned to take advantage of opportunities in the credit and deposit markets, if they're willing to be bold in a time of risk aversion.

Unemployment--The U.S. unemployment rate is the highest it has been in 25 years as employers continue to cut jobs. It could hit 9.5% by year-end and 10.5% in 2010. CUNA economists expect unemployment to continue to increase at about 300,000 jobs per month through the end of 2009.

Housing--Rising foreclosure numbers and the supply of unsold homes puts even more downward pressure on home prices. Analysts say the housing market will continue its slide through 2009, despite reports of higher home sales in some areas and slight improvements in home construction.

Bankruptcy--The weak economy and its repercussions--rising unemployment, lower pay, fewer people with health insurance and the mortgage crisis--all play a role in rising bankruptcies. Analysts expect bankruptcy filings to reach nearly 1.5 million by the end of the year--a 36% increase over the 1.1 million filings in 2008--and surpassing the average number of annual filings (1.4 million) that took place before new bankruptcy laws were enacted in October 2005.

Lending--Although credit union loan growth will fall to 6% in 2009, credit unions should look for excellent lending opportunities in business, auto, student and mortgage lending in 2010. This is because many banks will be reluctant to lend in these areas due to their capital constraints, higher risk aversion, cash hoarding and tighter underwriting standards. Loan growth will rebound in 2010 to an 8% annual growth rate, the strongest pace since 2005.

Membership growth--For the first time in more than 20 years, credit unions saw an increase in the percentage of members in their prime borrowing years (age 25 to 44), to 42% of all members in 2008 from 38% in 2006. At the same time, younger members between the ages of 18 and 24 declined to 4% in 2008 from 6% in 2006. This represents a large, attractive market for credit union growth.

Corporate credit uinions--The National Credit Union Administration (NCUA) will continue to work through its corporate stabilization plan and its corporate restructuring initiative. While the costs and accounting procedures of the plan have yet to be finalized, it's clear the plan will reduce credit union earnings.

Legislation--NCUA's corporate stabilization plan will dominate credit union legislative and regulatory efforts this year and possibly beyond. CUNA will continue to monitor other important issues, such as lifting the business lending cap, mortgage cramdowns and interchange fee income.

Earnings--Credit union return on assets is expected to be only 0.4% in 2009 and 0.5% in 2010 as deteriorating credit quality and slower loan growth reduce earnings. Improving loan credit quality in 2010 will reduce provisions for loan losses and boost credit union earnings.

Consumers--Consumers are saving more and spending less as the national savings rate, below 1% from 2005 to 2008, is now back above 4%. After losing a large portion of their personal wealth, consumers will need help and personal finance education from credit unions to manage their finances and live within their means.

The E-Scan also covers key issue areas: trust, demographics, economics, marketing, lending, financial literacy, payment systems, human resources, and legislation and regulation.

courtesy of cuna.org