A Reversal Taking Place On CU Balance Sheets

11/20/2022 CUToday

By Ray Birch

LOMBARD, Ill.—The prospects for a liquidity crunch are “hit or miss” among credit unions across the nation, says Bill Handel, who adds those CUs now feeling a crunch can count on some relief within the next 12 months. But there are other balance sheet issues developing, he is cautioning.

“This liquidity crisis is not a universal occurrence by any means,” said the SVP of research at Raddon, who noted for those experiencing the shortage it is a big issue in a year in which member lending demand, at least in dollars, is high.

The reversal that has taken place on many credit union balance sheets—and quickly—has been a surprise to many CEOs, CFOs, and ALCO members within the movement, whose organizations not that long ago were looking for ways to effectively respond to just the opposite—how to respond to rising deposits that came flooding in during the pandemic due to stimulus funds, eroding their net worth ratios in the process.

As CUToday.info has been reporting, in its own analysis CUNA recently pointed out that 2022 continues to be a year in which credit unions are experiencing the fastest lending growth since the 1980s. That growth is broad-based, the trade group said, with very strong, double-digit growth in mortgages, automobile loans, and unsecured loans.

An Emerging Concern

“Some organizations have seen very phenomenal loan growth this year,” noted Handel. “What you're seeing is prices are higher and things are costing more due to inflation. Look at the average price of a new car, for example. While the unit sales of loans may not be increasing at a fast pace, those average prices are going up and we are seeing loan demand grow. The loan dollars are higher.”

While that scenario can clearly be seen among those feeling the liquidity shortage, Handel said there is another, less obvious concern rising.

“The silent piece of all this is some of the investments that were made by credit unions in a lower-rate environment…If you redeem those things now to free up some liquidity, you're going to take some fairly significant hits,” he said. “While loan-to-share ratios may not be at catastrophic levels, many credit unions can't do something that they would normally do—which is as loan demand begins to rise they sell off investments.”

Not an Easy Forecast

How long will the liquidity shortage continue for some credit unions? Handel said that is not easy to forecast, but he added if a recession happens, which appears likely, that will help to alleviate the problem.

“I do believe a recession is imminent, and I think that in itself will impact loan demand,” said Handel. “I think the solution to some the pressures that some of these credit unions face will be a slowdown in the economy that will pull some pressure off loan demand.”

Bill Handel

As a recession eases liquidity issues within the industry, credit unions’ next big concern may be credit cards, said Handel.

The spending down by members of their stimulus funds--one of the factors that have led to the liquidity crunch--is also leading to growth in credit card usage by consumers, noted Handel.

“A big deal is the growth of credit card balances,” said Handel. “Look at the growth of card balances on an annualized basis across all financial institutions.”

Roaring Back

Handle pointed out that credit card balances declined during the pandemic, but have come roaring back this year.

“So far this year, if you look at the annualized growth rate of credit balances, through the first two quarters of 2022 it was 17%,” said Handel. “This is a real shift in terms of consumer behavior—their borrowing patterns. We're not seeing this in any other category of loans. Obviously, that's a dangerous thing for us economically if people start carrying too much debt on credit cards.”

Handel said the card debt is not yet at the “point of danger.”

“It's just something to be aware of,” he said.

But just as other industry observers have stated, the rising-rate period in which financial institutions find themselves may prove challenging for CFOs who were not in their roles during the last rising-rate environment.

Déjà vu? Not For Everyone

“This is a different environment than many people have been used to,” said Handel. “I think many people are not used to dealing with this. I'm old enough that I can think back to the 1980s when we were talking about 18% mortgage rates. Again, organizations have been flooded with deposits—stimulus money. They were looking at how to move this out of cash because you're not earning anything on cash. Also, you are not paying anything on that money, but in order to get a return, you're going out three of five years on securities. So, you're a little bit of hurt right now. That's the lessons CFOs learned. You have to think longer term, and you have to think about things many have never seen in terms of interest rates. We haven't seen this rapid rise in interest rates since the 1980s. And we haven't seen this rate of inflation since the 1980s.”