Banks Give a Glimpse of a Brighter 2021 for Credit Unions

Banks bet heavily in the third quarter that the worst of the pandemic recession was behind them, lowering their loan loss provisions to a level slightly lower than a year ago when weighted by assets.

The FDIC Quarterly Banking Profile released Tuesday showed banks provided $14.4 billion for loan losses in the three months ending Sept. 30, up 3.5% from 2019’s third quarter in absolute terms. However, the provision was an annualized 0.27% average assets, down from 0.30% in 2019’s third quarter.

Moreover, the third-quarter provision was down sharply from $52.7 billion in the first quarter and $61.9 billion in the second quarter.

NCUA data for the third quarter is expected later this month. While banks and credit unions are different creatures, they swim in the same water.

Diane Ellis, director of the FDIC’s Division of Insurance and Research, said the level of third-quarter provisions “suggests that some banks consider the reserves that had previously been set aside to be sufficient.”

The second-quarter provision was an annualized 1.20% of average bank assets, the highest ratio since the second quarter of 2010, a year after the official end of the Great Recession. During the Great Recession, provision ratios ranged from 1.00% in the fourth quarter of 2007, the official start, and 2.08% in 2008’s second quarter.

Credit unions’ third-quarter loan loss provisions were $2.2 billion or an annualized 0.49% of average assets, according to Callahan & Associates, a Washington, D.C., credit union company. The third-quarter provision was still higher than 2019’s third quarter provision of $1.6 billion (0.42% of average assets), but lower than the second quarter. Credit union loss provisions rose steeply in the first quarter to $2.1 billion (0.53%), and then to $2.7 billion (0.64%) in the second quarter, according to NCUA data.

FDIC Chair Jelena McWilliams said the lower provisions by banks combined with an increase in non-interest income were the main factors behind an increase in net income for the third quarter, compared with the first and second quarters. However, the $51.2 billion in net income for the three months ending Sept. 30 was still 11% lower than 2019’s third quarter.

“Lower provisions reflect the improving economy and a general expectation from the banking industry of stabilization in the expected future credit performance of the loan portfolio,” McWilliams said.

“However, economic uncertainty and the low interest rate environment remain headwinds for the banking industry,” she said, citing lower net interest margins, an increase in nonperforming loans and a decline in loan volume.

“The low interest rate environment, flat yield curve and continued economic uncertainties related to the trajectory of the COVID-19 pandemic will likely continue to exert downward pressure on revenue and challenge the banking industry over the near to medium term,” she said. “Nonetheless, the banking industry remains well capitalized with ample liquidity and has, to date, weathered the economic effects of the pandemic.”

The FDIC report provided the first chance for credit unions to get a comprehensive look at how their auto loan portfolios have fared compared with banks and other lenders.

The FDIC’s third-quarter report showed bank auto loan portfolios stood at $489.2 billion on Sept. 30, up 2.4% from a year ago. CUNA Mutual Group’s latest Credit Union Trends Report showed credit unions held $385 billion in auto loans Sept. 30, up 1.2%.

Banks have been outpacing credit unions on auto loans for more than a year, but the biggest gains are coming from captives and other lenders.

Comparing FDIC and CUNA Mutual numbers with totals reported in the Fed’s G-19 Consumer Credit Report showed that lenders other than banks and credit unions held $348.7 billion in auto loans Sept. 30, up 8.2% from a year earlier.

In terms of market share, the numbers showed other lenders had their biggest gains since March 31. Credit unions had 31.5% of loans Sept. 30, down nearly 0.6 percentage points since March. Banks’ share fell 1 point to 40% over the six months, while others rose 1.6 points to 28.5%.

Auto loans are a small part of banks’ loan portfolio and have been growing at half the pace of the total.

Total loans at banks stood at $10.9 trillion Sept. 30, up 4.9% from a year earlier, while credit union loans grew 6.6% to $1.19 trillion. Other comparisons included:

• Commercial and industrial loans at banks rose 14.5% to $2.5 trillion. Member business loans at credit unions grew 14.9% to $90.2 billion.
• Residential mortgages at banks grew 2.7% to $2.2 trillion, while at credit unions total real estate loans (including business loans backed by real estate) grew 9.3% to $602.3 billion. Both numbers can be affected heavily by sales.
• Credit cards at banks fell 10.8% to $796.5 billion. At credit unions they fell 5.7% to $61 billion.
• Other personal loans at banks grew 3.8% to $424.2 billion. At credit unions, unsecured consumer term loans grew 14.3% to $52.8 billion.