Credit in 2024 Could Be Stormy – Credit Unions Should Watch Closely

You’re not alone if you feel like the economy is sending mixed signals. Although “uncertainty” is a label that can always be applied to the future, it’s a spectrum from high to low. For nearly a decade, the Federal Reserve Bank kept interest rates below 1% – which also marked a period of relatively low uncertainty. Today, the Fed has signaled a desire to keep the rate steady at around 5.25%. Despite the supposed stability, uncertainty is very high and concerns about a recession carry weight. Credit unions need to stay alert for how economic headwinds in 2024 could affect their credit portfolios.

The likelihood of a recession on the scale of 2008 seems small, thanks to healthy signals from the job market and GDP numbers. However, many credit unions have built commercial loan portfolios — and the commercial real estate market faces tough choices.

There’s no call for dramatic action at the moment, but there is an imperative for lending executives to monitor the situation for early signals of trouble and be as proactive as they can.

Proactive Portfolio Monitoring Doesn’t Happen Overnight

As much as investors and economists like to focus on numbers, the real economy is affected by emotions as much as fundamentals. Take Tesla’s stratospheric stock gyrations or the consumer confidence index; both of these charts reflect the significant role that belief and emotion play in moving markets.

One of the best ways to balance volatile emotions is through data analysis. Trustworthy data can help you remove bias and assess the situation using facts. The difference between a problem and an opportunity is usually a matter of perspective. By collecting a wide range of data points, analyzing them for patterns and vetting your perspective against other trustworthy people in the industry, you can form a more balanced view of what’s happening.

If you’re building out a robust data analysis and forecasting practice, be sure to include these metrics:

• Changes in deposit balances;
• Changes in credit line utilization; and
• Credit rescores.

It’s also important to begin monitoring as soon as possible. Historical data can serve as a counterweight to momentary spikes or plunges. What feels like an extreme change today may seem normal and proportional in another six months, especially because your portfolio is unique and may differ from national trends or regional shifts.

Once you’ve got a sense of what’s happening in your portfolio, you can formulate tactical responses to those changes, such as offering to renegotiate loan terms rather than allowing an account to slip into default.

Business Needs Differ From Consumer Needs – Tailor Your Responses to Each

Credit unions have focused primarily on consumer or retail banking needs for most of their existence. Today, credit unions have matured their business models and are taking on new challenges, such as commercial lending. Serving the needs of a business requires a different set of tools and protocols. Factors such as job loss, illness and accidents can be just as disruptive to a business owner as they are to the average consumer, but the consequences deserve special consideration.

You may already have a strategy for “at-risk” consumer loans, such as how much grace to offer for delinquency, how much you’re willing to reprice a loan and how much additional reserve you need to cover a default. These are important factors to consider for your commercial clients as well.

Nobody likes having hard conversations with borrowers who are struggling. You can prepare for these moments by rehearsing with staff and developing empathetic, firm guidelines for helping borrowers regain their footing.

Watch the Weather Forecast and Dress in Layers

As any parent with school-age children can attest, the best approach to dealing with uncertain weather is to watch the forecast and dress in layers. For credit union lenders, this means monitoring your portfolio on a regular basis and developing action plans for different scenarios. Start with a “good, bad and ugly” set of plans and expand it as you see fit.

The weather is defined by change, and the U.S. economy is similar. Although high uncertainty may not do your blood pressure any favors, it will present you with challenges that can be transformed into opportunities if you’re ready for them.

Bryan Peckinpaugh is SVP for the Carmel, Ind.-based lending technology company Baker Hill.