CUNA Predicts Lower Income in 2022
Economists forecast loans will rise 9% next year while ROA matches pandemic-depressed 2020.
CUNA has raised its estimate for net income this year, but has lowered it for next year even though it expects loan growth to rise to pre-pandemic levels.
CUNA’s Sept. 17 forecast estimated this year’s net income as a percent of average assets will be 0.95%, up from 0.85% in its previous forecast dated June 14. For 2022, it forecast ROA of 0.70%, down from 0.85% in its June 14 forecast.
At the same time, it has raised its forecast for 2021 loan growth to 6%, up from 5% in its June 14 forecast. It still predicted growth for 2022 to be 9%, which is close to the average for the past five years.
So why would this year’s ROA, which is expected to be close to that of pre-pandemic 2019, fall next year to a level close to 2020, when credit unions bore heavy impacts from the pandemic?
CUNA Senior Economist Dawit Kebede said Tuesday that the main force behind the drop in ROA next year is the same force that played the main role in ROA falling in 2020 and rising in 2021: Loan loss provisions.
In the first half of 2020, loan loss provisions were a 59 basis-point expense against ROA of 0.57%. In the second half of this year, ROA was a 7 basis-point expense against 1.11% ROA with many credit unions taking back provisions as income.
That swing in loan loss provisions in turn reflects the freakishly high asset quality since the pandemic’s onset, a byproduct of government supports that provided much more support to household income than many economists expected.
“Credit union asset quality is near its healthiest level in the history of NCUA data, which is very unusual for the early stages of recovery from a recession,” CUNA’s forecast said.
Kebede said the loss of government fiscal support explains why CUNA expects credit unions should expect loan quality to deteriorate modestly and lead them to increase their loan provisions next year to more normal levels, which in turn will contribute to lower ROA.
Other factors will be tight interest margins, supply shortages putting a brake on auto lending and the cooling the mortgage market. If those factors worsen more than expected, it could cause ROA to drop below 0.70% next year, he said.