Credit Unions are a fascinating aspect of financial services. Rather than running as private, for profit financial institutions, credit unions serve on behalf of their members. In the United States, the governing body is the National Credit Union Administration (NCUA), rather than the Federal Reserve Bank, which oversees banking institutions.
This link provides a history of Credit Unions in the United States, the first of which began in 1909 as St. Mary’s Cooperative Credit Association, based in Manchester, New Hampshire. According to the site, “For just $5, the price of one share of capital stock, anyone in the community could become a member. Savings were accepted from workers, families, and children.”
Today, there are 5,174 credit unions in the United States, and more than 1 of 3 Americans have a relationship with these member-owned financial service companies.
One of the interesting facets of credit unions is that credit unions tend to be more conservative in their lending, risk tolerance, and asset mix than commercial banks. Federal credit unions, those with national charters, operate with interest rate caps and standards to ensure that lending is not as speculative as commercial banks.
Recently published numbers by the NCUA indicate operational stress from the COVID-19 crisis. Though we view some challenges as significant, our observation is that the controls in place protect the credit union function and that the industry will withstand current stress. Here are two key credit card related metrics detailed in the current NCUA report.
- Credit card balances rose $3.3 billion, or 5.5 percent, to $64.4 billion.
- The credit card delinquency rate rose to 137 basis points from 126 basis points in the first quarter of 2019.
In a broader sense, there is stress in the Credit Union model, according to the Credit Union Journal. Year over year, loss provisions are up 34.1%, and net income is down 40%. Membership growth fell 10% to 3.6%.
The article also points out industry consolidation. In Q1 2016, there were 6,000 credit unions. The number of credit unions fell steadily through 2020, with an 800 institution decrease, now numbering 5,200.
Overall net income plummeted between Q1 2019 and Q1 2020, from $14.18 billion to $8.4 billion.
As to credit cards, the Credit Union Journal article noted, “Growth in credit card spending was also down, rising just 5.5% ($3.3 billion) for a total of $64.4 billion. The year ending March 31, 2019, saw a 7.7% increase in this space, and the drop this year can be attributed both to an overall slowing of credit card growth as well as consumers reducing credit card spending as the pandemic hit and statewide stay-at-home orders went in place.”
We expect further turmoil. Credit card delinquencies rose from 1.26% to 1.37% YoY for 1Q. With 2Q numbers looming, we can see further deterioration by up to 50%, depending on how aggressive payment deferral programs deployed.
Either way, the credit union industry will absorb the risk, albeit with an impact to return on assets. That is one of the strengths in limiting investment exposure to unsecured lending, such as credit cards.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
