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NCUA One percent ROA not holy grail
WASHINGTON (5/7/08)—-In the current economic environment, the National Credit Union Administration (NCUA) expects credit unions to have lower return-on-average-asset (ROA) ratios--and that’s OK. “Credit unions have high net worth, and using your capital appropriately to deal with this very severe market dislocation is OK,” said NCUA Board Member Gigi Hyland during a CUNA webinar titled, “CU Response to the Current Economy: NCUA/Compliance.” NCUA Director of the Office of Examination and Insurance Dave Marquis and CUNA Chief Economist Bill Hampel also participated in the Friday event, which now is archived. “One percent ROA is not and cannot be a holy grail anymore, especially in this market,” said Hyland, who reiterated the agency’s August 2006 evaluation of earnings letter to credit unions. That NCUA supervisory letter clarified that agency examiners are expected to evaluate each credit union's earnings level relative to net worth needs, financial and operational risk exposures, the current economic climate, and the institution's strategic plans. Overall, U.S. credit union net worth is expected to fall to about 11% by December 2008, which remains “a very strong capital cushion, putting credit unions in a very good position,” according to CUNA’s Hampel. This cushion will be important as credit union return on average assets dips. ROA at the end of 2007 was 64 basis points--a decline from 82 basis points at the end of 2006. However, the economist noted that in the fourth quarter of 2007 alone, loan loss provisions drove ROA down to 0.32%. Hampel projects year-end ROA of 0.53% in 2008 and 0.70% in 2009. Hyland said the agency is “very keen and supportive” of credit unions continuing to be the trusted financial partner of their members. “If you have an opportunity to help a member in need, we urge you to rework their loan in the context of the credit unions business policies and also that fits the member’s needs,” said Hyland, who reiterated that credit unions are not part of the current mortgage problem because they have appropriately focused on members. In his economic analysis, CUNA’s Hampel said the U.S. economy, for all practical purposes, is in a recession for the first half of this year. “For most of this year and most of next year, the economy is going to look and feel very weak--much like a recession,” he said. “Therefore your members will act as if we’re in a recession--that’s what matters.” The credit crunch--a condition where even people with good credit have difficulty getting a loan-—has spread to the rest of the economy. “This has made things worse,” said Hampel. However, noted the economist, this condition has created an opportunity for credit unions. “If other lenders are less willing to lend to good credits, there may be opportunities for credit unions to lend to those members who otherwise would have borrowed from someplace else,” said Hampel. The recovery should begin in the second half of this year, mostly fueled with Federal tax rebates. Hampel warned however that once consumers spend the rebates, the economy could sputter again. Hampel’s outlook for credit unions through 2009:
* Faster saving and asset growth; * Slower loan growth; * Significant increases in loan delinquencies and losses; * Substantial downward pressure on net income; and * Falling net worth ratios.
Looking forward, Hyland said the agency’s two areas of exam focus will be strategic planning and the evaluation of third party relationships. The credit union products currently showing the most signs of stress are home equity lines of credit--especially variable rate loans--mostly in areas where home values have dropped, according to NCUA’s Dave Marquis. Under the risk focused exam process, Marquis said the NCUA is shifting resources to areas hardest hit, especially California, Florida, Nevada and Arizona. Use the link below to access the complete archived CUNA webinar.
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