CUNA economists have been continuing to gain confidence in the economy’s growth this year, but they said they still expect credit unions to perform worse than they did during the height of pandemic restrictions in 2020.
The latest forecast from CUNA and CUNA Mutual Group, both of Madison, Wis., showed credit unions generating net income in the first quarter at an annualized rate of 0.60% of average assets. That compared with an actual ROA of 1.48% for the Top 10 credit unions by asset size.
Still, CUNA’s ROA estimate for the 12 months ending Dec. 31 was higher than the one it released in February. Its April forecast predicted ROA to be 0.60% for 2021 and 2022, up from February estimates of 0.50% for both years.
The biggest change in its new forecast was raising its estimate for economic growth to 6% for 2021, up from its February estimate of 4.5%. The gain will follow last year’s drop of 3.5% — the worst annual decline in gross domestic product since 1946.
“The recently passed $1.9 trillion stimulus package, increased pace of vaccination and rebounding job market have many economists optimistic about the prospects for a strong economic recovery in 2021,” Jordan van Rijn, CUNA’s senior economist, wrote in the forecast report dated April 21.
“The additional stimulus and improving labor market will increase deposits and boost loan demand at credit unions, particularly for auto loans. But rising interest rates will present a headwind, especially in the mortgage market,” he wrote.
Van Rijn said he expects earnings will suffer as credit unions realize fewer gains on sales from mortgages and interest margins remain tight. In the meantime, savings and asset growth will remain strong, lowering capital ratios.
However, he wrote, “the improving economy and additional stimulus will help maintain relatively healthy asset quality.”
The April forecast showed the 60-day-plus delinquency rate to be 0.65% for 2021, down from February’s forecast of 0.80%. Likewise, the net charge-off rate is expected to be 0.45% this year, down from February’s forecast of 0.60%.
“Despite the pandemic and worst recession in decades, credit union portfolio quality has remained incredibly healthy,” van Rijn wrote. “This is a testament to how well credit unions have worked with their members to delay and modify payments, and members have also benefited from multiple rounds of fiscal stimulus and expanded unemployment benefits.”
CUNA’s forecast of first-quarter ROA of 0.60% would mean an increase from 0.53% in 2020’s first quarter, which was cut by heavy loan loss provisions made after COVID-19 was declared a pandemic. However, net income improved to 0.83% by the fourth quarter.
For the Top 10 credit unions, the 1.48% first-quarter ROA rose from 0.51% in 2020’s first quarter almost entirely as provisions receded. However, even without provisions, ROA would have made a small gain: Despite a drop in income, including a large drop in net interest income, operating expenses fell by an even larger amount.