This could be a record-setting era for credit unions — and many of those will hurt the bottom line.
First, some good news: the industry is likely to break its own record for mortgage originations this year thanks to the boom in refinancing, Steve Rick, chief economist for CUNA Mutual Group, said during a presentation Thursday as part of the company’s annual Discovery conference. Some credit unions are selling these loans to the secondary market and getting near record levels of pricing, Rick added.
“[W]e're making a lot of income on what's called the gains on sales of mortgages,” Rick said. “[C]redit unions that are heavily involved in mortgage lending are making quite a lot of money right now on the mortgage business and the mortgage volume.”
But that boost in income is being offset by number of other negative factors.
The unemployment rate has been one of the most talked about metrics since state and local officials began ordering the closure of non-essential businesses to slow the spread of the coronavirus. That sent the country’s economy reeling with millions of Americans getting laid off.
The unemployment rate averaged roughly 12% in the second quarter, which would be “one of the highest unemployment rates since the Great Depression of the early 1930s,” Rick said. During the Great Recession, unemployment topped out at 10%, he added.
That could affect credit quality through at least next year since it will take time for the millions of Americans who are out of work to find new jobs. In the meantime, they may struggle to repay debt. The net charge-off rate could reach 1.1% in 2021, more than double the “natural” charge-off rate of 0.5%.
The industry should also expect a decline in the “other income” category, which includes gains on sales of mortgages and fees from interchange. The surge in gains from selling mortgages will be offset by an even bigger decline in interchange as members reduce spending, Rick said.
Other income as a percent of average assets should total 0.68% for the year, down from 0.8% in 2019, according to Rick’s data.
Lenders are also grappling with record low interest rates. The 10-year Treasury note was around 0.6% in July, about 3 percentage points below the rate in July 2008.
“This is incredible,” Rick added. “We are seeing the lowest interest rates in American history.”
This will contribute to the yield on assets dropping 3% in 2021, another record low, as loans start repricing in the current interest rate environment, Rick said. Investments will also begin changing over into assets with lower yields.
The industry will also have to contend with record low net interest margins. This number should fall to 2.85% this y ear, down from 3.15% in 2019, and then decline even further to 2.5% in 2021.
“[W]hen you have the lowest interest rates in American history, you're going to have some of the lowest margins we've ever seen at credit unions,” Rick said.
Because of the constraints on both fee income and interest income,
“When you have the lowest interest rates ever and the highest unemployment rate in modern history will have a significant impact on credit union earnings going forward,” he added.
