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The Economy and Credit Unions

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The Economy and Credit Unions Powered By Docstoc
					Utah Credit Union Association
Volunteers Conference
Saturday, October 22, 2011




            National and Utah
            Economic Outlook
                                       Mike Schenk
                          Vice President, Economics & Statistics
                           Credit Union National Association
                    Telephone: 608-231-4228 Facsimile: 608-231-4924
                               E-Mail: mschenk@cuna.com
          Macro Economics

Three big goals:
1.
2.
3.
              US Unemployment Rate (%)
                        Source: BLS
12                                                      12


10                                                      10


 8                                                      8


 6                                                      6


 4                                                      4


 2                                                      2


 0                                                      0
     80   83 86   89   92 95   98     01 04   07   10
             Market Interest Rates
             1960 to 2011
            20
            19
            18
            17
            16
            15
            14
            13
            12
            11
(Percent)




            10
            9
            8
            7
            6
            5
            4
            3
            2
            1
            0
                 80   82   84   86   88   90   92     94   96   98   00      02   04    06      08    10


                                                    Recession    Fed Funds        10-Yr. Tsy.        Line 5
Source: Federal Reserve & CUNA E&S.
Economic Forecast
September, 2011


                                         Actual Results   Quarterly Results/Forecasts       Annual Forecasts
                                        5Yr Avg 2010 2011:1 2011:2       2011:3    2011:4    2011     2012

Growth rates:
*Economic Growth (% chg GDP)             0.96%   2.80%   0.40%   1.00%    1.50%     2.00%    1.23%    2.25%
Inflation (% chg CPI)                    2.10%   1.40%                                       2.50%    1.50%
Core Inflation (ex. food & energy)       2.00%   0.60%   2.00%   1.70%    1.50%     1.25%    1.61%    1.50%
Unemployment Rate                        6.80%   9.70%   8.90%   9.10%    9.00%     9.00%    9.00%    8.75%
Fed Funds Rate                           2.50%   0.18%   0.18%   0.10%    0.10%     0.10%    0.12%    0.15%
10-Year Treasury Rate                    3.91%   3.21%   3.46%   3.16%    2.40%     1.75%    2.69%    2.00%
* Percent change, annual rate
All other numbers are averages for the period
                      Credit Unions are Careful
                              Lenders
            Total Loan Delinquencies as a Percent of Loans Outstanding
                                 5.37%
                                              4.87% 4.71%                                          2007
                                                                                                   2008
                                                                                                   2009
                                                                                                   2010
                    2.93%                                                                          Mar. 2011


                                                                                                        1.82% 1.75%
                                                                                                                      1.63%
        1.40%                                                                            1.37%
                                                                            0.93%



                                 Banks                                                         Credit Unions
Source: FDIC, NCUA and CUNA Policy Analysis . Banks delinquency is 90+ day, CU delinquency is 60+day.
                       Credit Unions are Careful Lenders
                      March 2011 Net Loan Chargeoffs – Annualized


                                                 1.18%
        Business Loans
                                                1.14%


                                             0.63%              Credit Unions
        Mortgage Loans                                          Banks
                                                     1.45%


                                                     1.48%
      Consumer Loans
                                                                  4.30%


                                               1.01%
               Total Loans
                                                        1.82%

Source: FDIC, NCUA & CUNA Policy Analysis.
         Credit Unions Served Borrowers As
             Other Lenders Pulled Back
                Growth Since Beginning of Recession: 12/07 to 3/11

                   Banks
                                                       38.3%
                   Credit Unions




                              13.1%
                                                                          5.4%



                                                                -8.3%
         -13.0%                              -14.7%
              Real Estate Loans                Business Loans     Total Loans

Source: FDIC, NCUA & CUNA Policy Analysis.
           Credit Unions: Consumer Friendly
                        Pricing
                                                Loan Interest Rate Averages




Source: Informa Research Services. Data as of December 14, 2010.
            Credit Unions: Consumer Friendly
                         Pricing
                                          Savings Account Interest Rate Averages




Source: Informa Research Services. Data as of December 14, 2010.
                       Credit Union Financial
                              Benefits
                                (2010 Estimate - Billions)




         $1.1

Higher Savings Lower Interest Fewer & Lower Nonmember
    Yields     Rates on Loans     Fees        Benefits
Source: CUNA Policy Analysis.
         Largest 100 Banking Institutions
         (1992 share = 41%; 2010 share = 73%)




    Smaller Banking Institutions
(1992 share = 53%; 2010 share = 21%)




            Credit Unions (1992 share = 6%; 2010 share = 6%)
    CU Balance Sheet                                                                                                                 Deposit Factors:
                                                                                                                                     1.Economic uncertainty and members’ preference for liquid
                                                                                                                                     funds will buoy deposit growth.
                                                                                                                                     2.Large interest rate differentials between loans and savings
                                                                                                                                     will encourage members to pay down debt rather than save
                                                                                                                                     any surplus funds.
                          Assets                                           Liabilities & NW                                          3.Rising oil prices will reduce savings balances.
                                                                                                                                     4.Inflation rates higher than deposit rates will produce
                                                                                                                                     negative returns on savings deposits.
                                                                                                                                     5.Large federal deficits may lead to expectations of higher
    Investments (34%)                                                Shares & Deposits (86%)                                         future taxes fostering additional savings growth today.
                                                                                                                                     6.The national savings rate is back to the level in the late
    ’07=5%/’08=9%/’09=30%/’10=13%/’11=9%/’12=7%                         ’07=5%/’08=7%/’09=10%/’10=4%/’11=5%/’12=5%                   1990s.
                                                                                                                                     7.Falling home prices will encourage thrift.



    Loans (62%)                                                      Net Worth (10%)
                                                                                                                                     Net Worth Factors:
        ’07=7%/’08=9%/’09=1%/’10=-1%/’11=0%/’12=3%                       ’07=7%/’08=3%/’09=-1%/’10=5%/’11=7%/’12=8%                  1.Rising net income in 2011 and 2012.
                                                                                                                                     2.Capital contributions will outpace asset growth raising net
                                                                                                                                     worth-to-asset ratios.
                                                                                                                                     3.CUs are slowing deposit and asset growth to maintain or
                                                                                                                                     boost capital-to-asset ratios..
Investment Factors:                                               Loan Factors:                                                      4.BASEL III will be an impetus for Congress and NCUA for
                                                                                                                                     capital reform.
1.Federal Reserve announced that economic conditions “are         1.Economic recovery and accompanying job growth will
                                                                  encourage borrowing in 2012.                                       5.Alternative capital (subordinated debt) is a top CU
likely to warrant exceptionally low levels for the federal
                                                                  2.Rising consumer confidence will encourage spending.              legislative priority.
funds rate at least through mid-2013 forcing CUs to
reevaluate the duration of investments.                           3.Rising stock prices will produce a “wealth effect” fostering
2.Rising loan growth will reduce investment portfolio             increased consumption. But volatile stock prices could eliminate
growth in 2012.                                                   any “wealth effect:”.
3.Corporate CU reconfiguration will alter investment              4.Household s have accelerated loan payments and payoffs which
options.                                                          is outpacing originations and reducing loan balances. But
4.Financial institutions are sitting on record levels of excess   deleveraging should fade in 2012.
reserves ($1.6 trillion) earning 0.25%.                           5.Low spending in 2009-2011 has created much pent-up demand
5.Excess liquidity is punishing CU earnings with short-term       for durable goods. Auto loans, credit card loans and purchase
investment yields lower than deposit interest rates.              mortgage loans will be strong growth areas.
                                                                  6.The recession has created a large pool of potential borrowers
                                                                  with sub-prime credit scores.
                                                                  7.Rising auto sales may reduce 0% financing offers.
                                                                  8.Udall-Snow Small Business Lending Enhancement Act is
                                                                  moving in Congress to raise the business loan lending cap from
                                                                  12.25% to 27.5% of assets.
                                                                    1.    The Federal Reserve’s QE-2 program/Twist (print money to buy bonds) will
                                                                          keep interest rates low until 2012.
                                                                    2.    CUs are weighing the marginal risk (credit/interest rate) versus marginal return
CU Financial Results                                                3.
                                                                          (additional YOA) of alternative assets to boost NIMs.
                                                                          Repricing of maturing loans will lower YOAs

Mid-Year 2011                                                       4.
                                                                    5.
                                                                          Rising loan growth will raise YOAs.
                                                                          Rising short-term interest rates in 2013 will raise yields on short-term
                                                                          investments.


                                                                    1.    Rising short-term interest rates in 2013.
                                                                    2.    Continued repricing of maturing CDs is lowering COFs.
                                                                    3.    Excess liquidity will allow CU deposit rates to lag increases in market rates in
     Interest Income                                          414         2013.
                                                                    4.    Ultra-low market interest rates are preventing CUs pricing their deposits below
                                                                          market, reducing earnings opportunities .
- Interest Expense                                            96    1.    NIM expected to rise in 2013 as YOA rise faster than COFs.
                                                                    2.    A flatter yield curve in 2012 will put downward pressure on NIMs by making
= Net Interest Income                                         318   3.
                                                                          ST borrowing and LT lending less lucrative.
                                                                          CUs are reevaluating their “GAP” strategy due to changing interst rate forecasts.


                                                                    1.    The interchange fee cap rule will be implemented on October 1. This will cap
                                                                          the maximum fee charged per debit card transaction to 21 cents (plus an
                                                                          additional 2-3 cents for fraud prevention) for institutions greater than $10 billion.
                                                                    2.    Concerns over the effectiveness of the less than $10 billion “carve out” rule.
+ Fee/Other Income                                            126         Statutory exemption may not work as intended, but it will take a few years for
                                                                          small institution interchange rates to converge to large institution rates.
                                                                          Interchange income will drop little in 2011, but may decline in 2012.
- Operating Expense                                           316   3.    Changes to overdraft rules will affect fee income depending on member
                                                                          behavior. Recession induced financial stress has incentivized consumers to alter
                                                                          behavior to minimize penalty fees.
- Loss Provisions                                             51
                                                                     1.    NCUSIF premiums expected to be zero in 2011-12 due to large build up of
                                                                           reserves for insurance losses and fewer CU failures.
= Net Income                                                  77     2.    Corporate stabilization assessments expected to be 25 bps of insured shares in
                                                                           2011 and 9 bps in 2012.
                                                                     3.    Slowdown in branch expansion and continued cost containment efforts will
1.     ROA remains below its long-run average and questions                lower operating expense ratios.
       remain whether this will be the “new normal”.
                                                                     1.    Most CUs have sufficiently funded allowance for loan losses.
                                                                     2.    Job growth will improve credit quality and lower provisions
                                                                     3.    Local foreclosures will have a lingering impact on PLLs. Today 11 million
                                                                           homeowners are underwater. Ten percent of mortgage holders owe at least
                                                                           125% of the property’s value.
                                                                     4.    Home prices expected to fall 5% in 2011 and stabilize in 2012. 10% of all
                                                                           mortgages are at risk of foreclosure.
Credit Union Forecast
September, 2011


                                   Actual Results       Quarterly Results/Forecasts       Annual Forecasts
                                  5Yr Avg 2010      2011:1   2011:2   2011:3     2011:4    2011      2012

Growth rates:
Savings growth                      6.3%     4.5%     2.7%     0.7%       0.5%    0.6%        5%       5%
Loan growth                         4.3%    -1.5%    -1.2%     0.8%       1.0%    0.9%        1%       3%
Asset growth                        5.9%     3.3%     2.7%     0.7%       0.5%    0.6%        5%       5%
Membership growth                   1.3%     0.7%     0.4%     0.2%       0.2%    0.2%      1.0%     1.0%

Liquidity:
Loan-to-share ratio**              79.5%   72.2%    69.5%     69.5%      69.9%   70.0%     70.0%    68.7%

Asset quality:
Delinquency rate                   1.31%   1.75%    1.70%     1.60%      1.40%   1.30%     1.50%    1.20%
Net chargeoff rate*                0.83%   1.14%    1.00%     0.90%      0.90%   0.80%     0.90%    0.80%

Earnings
Return on average assets (ROA)*    0.40%   0.39%    0.73%     0.79%      0.70%   0.70%     0.73%    0.75%

Capital adequacy:
Net worth ratio**                  10.7%   10.1%     9.9%     10.1%      10.2%   10.3%     10.3%    10.5%

* Annualized Quarterly Data
**End of period ratio

See also our MCUE website
If you have any questions or comments send an email to srick@cuna.coop

				
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