Callahan: Rate Cuts Could Spur Lending
CU analysts find some improvement in Q2 net income since last fall, but loan growth remains much slower than a year ago.
During the credit union company’s second-quarter Trendwatch webinar, analysts said the market is priced for 100 basis points in cuts by year’s end.
Jay Johnson, Callahan’s chief collaboration officer, said credit unions held $1.63 trillion loans on June 30, up 3.7% from a year earlier. Growth in the same period a year earlier was 12.6%.
“From a credit union perspective, if the Fed does start cutting rates as is anticipated in the second half of the year, maybe we’ll see some pickup and borrowing activity as we’ve seen,” Johnson said.
Jason Haley, chief investment officer for ALM First of Dallas, said the market is expecting the Fed to cut rates by 100 basis points by year’s end. With only three meetings left for the year, the market is assuming at least one 50 bps cut.
Haley said the economy is fundamentally strong, despite recent weakening. Household debt has risen, but measured against disposable income it is at a low of at least 20 years. He said Wednesday’s inflation report matched market expectations.
Credit unions’ return on average assets was 0.71% for the three months ending June 30, marking two quarters of growth since hitting a low of 0.48% in the fourth quarter. ROA was still lower than the 0.77% of 2023′s second quarter.
The results were boosted by higher net interest income, and despite a 7% drop in originations. Home equity lines of credit grew 18%, an increase of $2.5 billion, but couldn’t make up for a 13% drop in auto and other consumer loans, which fell by $12.6 billion.
“It’s a different auto market than it was during the pandemic,” Johnson said. “The captive finance companies are much more active, so they’re really the ones taking a lot of the share both from credit unions and banks now.”
Alex Gekas, Callahan’s vice president of marketing, said shares were $1.95 trillion on June 30, up 2.7% from a year earlier, but an improvement from the 1.2% growth rate a year earlier.
“The annual growth rate of shares is actually the highest it’s been since year end, 2022. So while we’d like to see more share growth, it is trending up,” she said.
With loan growth still rising faster than shares, the loan-to-share ratio ticked up to 83.9% on June 30, but Johnson said the increase from March to June was typical.
And despite the increase in the loan-to-share ratio, Johnson said liquidity pressures are easing at credit unions as borrowing as a percent of assets fell for the second quarter in a row.
Unrealized losses on investments are still substantial, but Johnson said that source of liquidity pressure is also easing. “If the Fed starts lowering rates, that may give some relief, although for most these securities were bought at a time when we were still at those ultra-low rates,” he said.