Navigating Rough Waters: The 2024 Outlook for Credit Unions Amid Auto Loan Challenges
The forecast for 2024 suggests challenging times ahead for credit unions, particularly due to their significant involvement in consumer lending, especially auto loans. The aftermath of the pandemic has led to inflated car prices, posing potential risks for lenders as consumers grapple with increasing interest rates and may default on their loans.
Kroll Bond Rating Agency’s inaugural “U.S. Credit Union Compendium” predicts a tough year for credit unions, with impacts on their return on average assets and overall management challenges. These institutions face similar pressures to banks but with distinct challenges stemming from their funding practices, loan concentrations, and liquidity strategies.
An advantage for credit unions over banks is their leaner investment portfolios, as they focus more on member lending. Brian Ropp from Kroll notes in a discussion with The Financial Brand that, unlike many banks, credit unions aren’t burdened by devalued investment portfolios. They also have lesser involvement in commercial real estate lending, which is a concern for many banks.
Nevertheless, credit unions have greater exposure to consumer credit issues. According to Kroll, this exposure, particularly in auto loans, remains a significant concern for 2024, exacerbated by persistent high interest rates, reduced liquidity, and deteriorating consumer credit quality.
Brian Ropp mentions a decline in the credit union industry’s ROAA, highlighting a drop in earnings power, which traditionally served as a defense mechanism.
Credit unions are expected to increase provisions to loan loss reserves due to deteriorating asset quality, further strained by decreasing net interest margins and earnings power. Kroll anticipates a continued tightening of net interest margins.
The loan-to-deposit ratio in the credit union sector has increased, and credit card lending quality is deteriorating, especially among larger credit unions. Auto loan defaults are rising, not yet influenced by unemployment rates, but significantly affected by higher interest rates.
Historically strong in deposit funding, credit unions now face higher costs for deposits in the current high-rate environment. They continue to rely heavily on deposits, occasionally supplemented by brokered deposits, with deposit insurance being a key advantage.
Larger credit unions and those experiencing significant growth have increasingly turned to wholesale borrowing to bridge the gap between assets and deposits. Borrowings have surged in this segment, primarily sourced from the Federal Home Loan Bank System and the Federal Reserve.
Subordinated debt has become more accessible for credit unions, with buyers including other credit unions, institutional investors, and some banks. This source of capital is important for credit unions, which, unlike banks, cannot issue common stock and directly benefit from the proceeds of subordinated debt.
Kroll predicts a focus on capital preservation and moderated balance sheet growth for credit unions during economic downturns, leading to cost management strategies like reducing loan origination staff and mortgage banking operations.
