CU deposits and capital rise, earnings problematic

MADISON, Wis. (6/2/09)--Credit unions are seeing a swell in deposit growth, but may find it harder to generate earnings over the next couple of years, according to a Credit Union National Association (CUNA) economist.

The credit union movement's overall capital-to-asset ratio for April is at 9.6%, and the total dollar amount of capital is at $83 billion, reported the CUNA monthly sample of credit unions.

After falling for three consecutive months, credit union capital levels rose 0.1% in April, reaching $83.34 billion," Steve Rick, CUNA senior economist, told News Now. "Capital levels are now down 8.3% from the peak of $90.84 billion reached last November.

"Credit unions' return on assets is expected to fall to less than 0.20% in 2009--excluding corporate stabilization costs--as rising loan loss provisions eat up most pre-provision income," he added. "Over the next couple of years, all financial institutions are going to find it harder to generate earnings."

Credit union asset balances rose 0.5% in April and 4.7% year-to-date, Rick said. With assets growing faster than capital, the capital-to-asset ratio fell to 9.56% in April from 10.8% at the end of 2008.

"With this ratio expected to fall over the next two years, credit unions are now operating with a heightened awareness of risk, especially the systemic risks facing an economy going through the worst recession since the Great Depression," he added.

Credit union loans outstanding increased 0.2% in April 2009 and 0.3% during the first four months of 2009, down from a 1.2% increase during the same period of 2008.

Leading loan growth was other loans, rising 1.8%, while credit card loans and home equity loans grew 1.1% each. Used-auto loans (0.8%) and adjustable-rate mortgages (0.7%) also increased this month. Declining during April were other mortgages (-1.2%) and new-auto loans (-1.1%).

"Relative to other financial institutions, credit unions maintain more consistent credit standards throughout business cycles," Rick said. "This cost credit unions some loans in good times, but is now increasing their credit market share in the current economic downturn.

"Specifically, credit unions are making significant gains in the mortgage market," he continued. "Fixed-rate mortgage loans are up 10.5% from April 2008, while home equity loan balances are up 13%. Credit unions need to guard against a rising adverse selection problem, however, as high-risk borrowers who are denied credit at banks turn to credit unions for loans."

Credit union savings balances rose 0.7% in April, but grew 6.4% during the first four months of 2009. Individual retirement accounts grew the fastest with a 3.6% increase, followed by money market accounts (1.4%), share drafts (1%) and regular shares (1%). One-year certificates declined 0.6% during April.

"As U.S. households change their financial behavior by deleveraging their balance sheets, credit unions are seeing a surge in deposit growth," Rick explained. "Savings balances rose 0.7% in April and 6.4% year-to-date, the fastest pace since the 2001 recession. Credit unions should not minimize the scale of the changes sweeping over the financial services industry and should begin planning for the 'new normal' business environment."

The loan-to-savings ratio remains close to 79% during the last three months. The liquidity ratio--the ratio of surplus funds maturing in less than one year to borrowings plus other liabilities--remained at 19%.

Credit union 60-plus-day delinquencies grew to 1.6% in April 2009 from 1.5% in March.

courtesy of cuna.org