Banks Feel Similar Pains and Gains as Credit Unions

The FDIC released first-quarter data for banks showing they took auto loan portfolio share from credit unions, and benefited much more than credit unions from reversing loan loss provisions.

The FDIC’s Quarterly Banking Profile showed banks recorded $14.5 billion in income by reversing loan loss provisions in the three months ending March 31, or 0.26% of average assets.

That gain contributed significantly to banks’ annualized pre-tax returns on average assets of 1.76% for the first quarter, up from 1.38% in the fourth quarter and 1.70% in 2019’s first quarter. Pre-tax ROA bottomed out at 0.53% in 2020’s first quarter and 0.39% in the second quarter.

The FDIC’s news release said improvements in the economy and asset quality drove the increase in quarterly net income.

While several large banks and a few credit unions have been recording loss provisions as gains since late last year, the first quarter marked the first time the FDIC has found an industrywide reversal of loss provisions since data it provided going back to the first quarter of 1984.

After COVID-19 was declared a pandemic March 11, 2020, banks and credit unions took heavy loan loss provisions, reflecting the rapid economic shutdowns and widespread uncertainties.

Banks’ provisions were made more swiftly and deeper, and they began unwinding from them earlier than credit unions.

However, both banks and credit unions have been sharing the general trends of fast savings growth, slow loan growth and narrowing interest margins.

Banks held $18.5 trillion in deposits, up 17% from a year earlier.

They held $10.8 trillion in loans and leases as of March 31, down 1.2% from a year earlier and down 0.4% from Dec. 31. “This was the first annual contraction in loan and lease volume reported by the banking industry since third quarter 2011,” the FDIC said.

The main reason was credit card balances, which stood at $761.1 billion on March 31, down 12.8% from 12 months ago. Balances fell 8% from Dec. 31, which was larger than the typical post-holiday drop of 5% to 6%.

The average net interest margin contracted 57 basis points from a year ago to 2.56% — the lowest level since at least 1984’s first quarter.

Banks held $499.2 billion in automobile loans as of March 31, up 2.5% from a year ago and 1.5% from Dec. 31.

Credit unions held $383 billion in auto loans March 31, up just 0.4% from a year earlier and down 0.8% from Dec. 31.

The biggest gain over the past year has been with captives and other lenders who held $348 billion March 31, up 9.3% from March 2020. Their share rose from 26.9% in March 2020 to 28.4% in December, but fell slightly to 28.3% this March.

As a result, credit unions’ share of the auto loan portfolio has slipped. It was 31.1% as of March 31, down from 32.1% in March 2020 and 31.5% Dec. 31. Banks’ share fell from 41.1% in March 2020 to 40.1% Dec. 31, but rose to 40.6% this March.

Credit unions’ market share measured by the number of loans originated has also fallen.

Experian found credit unions originated 20% of loans in the three months ending March 31, down from 20.8% for all of 2020, 21.9% in 2019 and a peak of 24.5% in 2018. Banks, captives and other lenders increased their share from 2020 to the first quarter.

The FDIC also reported strong loan quality, with declines in delinquencies and charge-offs.