MADISON, Wis. (12/27/11)--This past year was a whirlwind for the U.S. economy and credit unions trying to rebound from a lingering recession, persistent unemployment, a depressed housing market, and worldwide economic trouble, especially in Europe.
So what does 2012 have in store for credit unions?News Now
asked Steve Rick, senior economist for the Credit Union National Association, for his top five economic predictions for what credit unions will experience next year.
They are:Return of loan growth
. After three years of basically no growth, credit unions in 2012 will see the return of loan growth. "Loan balances will grow 3% next year, which is good, because we are, after all, credit
unions," Rick said. "Although 3% is not great, it's better than zero."
Why will there be loan growth? Essentially, low consumer spending during the past three years has created substantial pent-up demand for durable goods--by definition anything that lasts three years or longer, such as cars, appliances and furniture. "These are the types of items for which credit unions usually make loans," Rick said.
A big improvement in loan quality
Click for larger view
. Loan quality will strengthen and improve as reflected by a drop in the loan delinquency rate. For 2011, the loan delinquency rate for credit unions was 1.6%--which means for every $100 in loans, $1.60 is not performing (paying interest), Rick explained. For 2012, the forecast is 1.35%.
Why the improvement? "Two reasons," Rick explained. "Strength of the economy and job growth. They will help people stay current on their loans, and those who are delinquent to get caught up on their payments."A nice drop in credit unions' provision for loan losses
. This is a ramification of significant improvement in loan quality. "We expect the provision to be down to 40 basis points of average assets in 2012 from 51 basis points in 2011," Rick said. "In 2007, it was 43 basis points. So in 2012, we predict it will be lower than--at 40 basis points--pre-recession levels."
The recession started in December 2007, Rick said.
Credit unions' bottom lines should improve
Click for larger view
. In 2012, credit unions' return on assets (ROA)--which is net income divided by average assets--should be 85 basis points, or 0.85%, up from 70 basis points, or 0.70%, in 2011, Rick said. The 15-basis-point jump is forecast because of better provisions for loan losses engendered by better loan quality mentioned earlier. Also, the corporate stabilization assessment will be nine basis points of insured shares in 2012, according to National Credit Union Administration estimates. That compares with 25 basis points in 2011, Rick said.
"That drop will help boost credit unions' bottom lines," Rick said.Credit unions will have turned the corner when it comes to allowance for loan losses
. The allowance for loan-loss ratio is the allowance for loan losses account relative to total loans. In other words, out of all the loans that credit unions have on their balance sheet sheets, what percentage of them are bad loans?
"The allowance ratio was a little over 1.6% in 2011," Rick said (see Credit Union Credit Quality chart--bottom one). "It was 0.7% before the recession. For 2012, it will continue to trend downward. Because of the better credit-quality outlook for 2012, credit unions may have overfunded their allowance account and will let it run down next year.
"For the first time in five years, credit unions in 2012 will keep loan-loss provisions--because that allowance has been built up over the past few years--less than net loan charge-offs," he explained (See bathtub flow chart--top one). "That will bring down the allowance for loan-loss accounts in absolute (dollar amounts) and relative terms (percentage of total loans)."