Credit Union Damage Expectations From Recession Diminish

CUNA doesn’t expect the recession to damage credit union earnings as it forecast previously, but it said its latest forecast depends on factors that can be upset by U.S. political tensions, West Coast fires, East Coast hurricanes and disappearing government benefits.

The CUNA economic and credit union forecast posted Wednesday reflects better-than-expected economic growth. It predicted credit unions’ return on average assets will fall to 0.50% for the 12 months of 2020, and 0.35% in 2021.Both represent increases from CUNA’s previous forecast in July of 0.35% in 2020 and 0.10% in 2021.

“However, there is tremendous uncertainty regarding the immediate future of the economy,” CUNA Senior Economist Jordan van Rijn said. “A sustained recovery will largely depend on successful containment of the COVID-19 virus but is also impacted by other immediate risks, including the potential for a drawn-out and disputed presidential election, continued wildfires on the West Coast and a record-breaking hurricane season.

“A second comprehensive coronavirus relief bill also appears significantly less likely before the presidential election, meaning that millions of households will be without the $600 expanded benefits or additional direct stimulus payments for the foreseeable future,” van Rijn said.

Besides the upward revision for ROA, van Rijn said other significant changes to CUNA’s previous forecast include:

• U.S. GDP will shrink 3.4% in 2020 — less than CUNA’s previous estimate of a 5.3% drop, but still the worst annual economic contraction on record.
• The unemployment rate will fall to 7.5% by year-end 2020 and 6.5% by the end of 2021, an improvement from its previous forecast of 10% this year and 8.0% next year.
• Credit union savings are expected to grow 18.6% this year, while assets grow 16.0%. CUNA previously forecast of 17% savings growth and 15% asset growth this year.

Three-month ROA rose from 0.53% in the first quarter to 0.61% in the second quarter, “largely a result of very strong mortgage lending and proceeds from sales to the secondary mortgage market,” van Rijn said.

But ROA will fall for the remainder of the year “as interest rate margins fall precipitously.” ROA will drop to 0.45% in the third quarter and 0.35% in the fourth quarter.

“New mortgages and other loans originated in 2020 and 2021 will have very low interest rate margins, while existing balances with higher margins will be paid off,” van Rijn said.

Portfolio quality is likely to deteriorate later this year “as deferments and forbearances expire, temporary unemployment becomes permanent, and government stimulus dissipates,” he said.

Credit unions typically see declines in loan balances during recessions, but they recorded a 12-month gain of 0.9% over the period ending March 31, and grew 2.1% in the second quarter boosted by an “incredible” 5.9% gain in mortgage lending.

Key assumptions for the forecast include:

• Society will increasingly adapt to the new normal of the pandemic by social distancing, mask-wearing and other measures to slow the spread of the virus.
• A vaccine will not be widely available until at least early to mid-2021.
• A comprehensive coronavirus relief package now seems significantly less likely this year, but the Federal Reserve and Congress will continue to support the recovery through low interest rates and smaller targeted bills.
• The government will provide greater stimulus after the November presidential election.

“Next year growth will gradually recover as a vaccine and other preventative measures are rolled out,” he said. “We do not expect GDP to return to its 2019 year-end level until the middle of 2021.”