Net Interest Margins to Continue to Rise for Credit Unions

Even as loan growth slows this year, credit unions can expect pre-recession rates of return thanks to rising net interest income, according to a report released Wednesday by CUNA Mutual Group.

The Madison, Wis.-based organization’s monthly Credit Union Trends Report showed the nation’s 118.3 million members at 5,637 credit unions owned $1.48 trillion in assets as of Nov. 30, up 6.1% from a year earlier. Savings grew 6.5% to $1.25 trillion and capital grew 7.2% to $160.2 billion.

Much of the growth came as membership grew 4.4% over the 12 months, its fastest pace in more than 20 years, said Steven Rick, CUNA Mutual’s chief economist.

“Rapid U.S. job growth and strong indirect auto loan demand are two major factors driving the surge in credit union memberships,” Rick said. “For 2019, expect another 2 million new jobs will be created and credit union membership growth to be at 3.5%.”

Total loans grew 9.4% to $1.06 trillion in the 12 months ending Nov. 30, with car loans growing 10.7% to $371 billion and real estate growing 8.4% to $518 billion.

New car loans grew 11.8% to $148.1 billion, while used car loans grew 10% to $222.9 billion. Rick said he expects new car unit sales to slow to a 17 million annual pace in 2019, down from 17.6 million in 2018.

“There should be enough truck and car sales to keep credit union new-auto lending growing above the 10% pace for the sixth consecutive year,” Rick said.

The Trends Report is based on data from CUNA’s Monthly Credit Union Estimates, the Federal Reserve Board and CUNA Mutual Group’s own economic analysis. The CUNA Mutual report matches the CUNA estimates released in early January, and forecasts for 2019.

The Trends Report also uses NCUA data showing credit unions’ annualized return on average asset ratios came in at 0.96% for the first nine months of 2017, the highest since ROA was 1.04% in 2003. ROA had plunged to a low of 0.18% in 2009 during the Great Recession. It climbed back to 0.84% in 2012, and ranged from 0.75% to 0.80% from 2013 to 2017.

Returns in 2018 were boosted by $735.6 million in rebates from the NCUA’s Share Insurance Fund. CUNA Mutual, like CUNA, forecasts ROA to be 0.85% this year. Even though loan growth will slow to 8%, Rick expects net interest income to rise.

“Credit union yield-on-asset ratios rose 25 basis points to 3.74% during the first nine months of 2018 due to rising loan-to-asset ratios – the ‘mix effect’ – and slightly higher interest rates, the ‘rate effect,’” Rick said.

Even though their cost of funds grew slightly, interest margins rose 15 basis points to 3.1% in 2018, the fifth consecutive year of rising margins after hitting a record low of 2.77% in 2013, Rick said.