By Ray Birch
ARLINGTON, Va.—Rising interest rates may have finally taken their toll on the optimism of credit union CEOs when it comes to lending.
Just two months after hitting its all-time high, a measure of credit unions’ outlook for growth, earnings and lending has had done a U-turn and hit its lowest point. As CUToday.info reported, NAFCU’s Credit Union Sentiment Index (CUSI), an index based on NAFCU member responses to eight questions that also includes views on
regulatory burden, recently sunk to the new low. The findings were published as part of its Economic & CU Monitor.
The CUSI hit its high point in August at 67.1, and fell to 61.7 in the latest, October report, said NAFCU Chief Economist and Vice President of Research Curt Long.
Long called the biggest drop in the CUSI since it was introduced more than a year ago “unprecedented,” and that the change is almost solely due to declining optimism by CEOs over what the future holds for lending. Long said the slow but steady rise in interest rates is finally being felt in loan demand, especially after the September rate hike by the Federal Reserve.
‘Dramatic’ Change
In September the Federal Open Market Committee increased the federal funds rate 25 basis points to range of 2% to 2.25%.
“That was a big drop in the CUSI—the biggest drop over a short period. I was surprised,” acknowledged Long, noting that the “general shape” of the economy is positive.
Long said when he first saw the latest CUSI results, he compared the October report to that of August 2018.
“Looking specifically at just the loan components of the CUSI, back in August the vast majority of respondents’ outlook for growth was positive, and almost half of them cited loan demand as the reason for that outlook,” Long explained. “Now, cut to October, and the number who have a positive outlook drops to below 20%. According to our respondents, just in those two months the lending situation changed dramatically.”
‘A Little Bit of Shock’
Long added that in the latest report a positive outlook on the economy had the greatest impact on the growth component, but that loan demand and applicant quality continued to decline in the lending component.
Many CEOs had become accustomed to the rock-bottom interest rate environment that has existed since the Great Recession of a decade ago, agreed Long.
Curt Long, NAFCU
“I think there was a little bit of a shock when that was over,” he said. “The interest rate environment we are in now is one we will be in for a while, and it will put a lid on loan demand for the foreseeable future. A couple of the biggest lending areas for credit unions—auto loans and mortgages—are pretty weak at the moment.”
Lending Collapse Not Expected
However, Long said he does not foresee loan demand “collapsing,” for several reasons.
“Consumers are in a pretty good place right now. Most people are working. We are starting to see some positive developments in wage growth,” Long said. “Economically, there are some pretty good signs now.”
Long agreed there may be some anxiety among credit union CEOs about managing their balance sheets through a rising-rate environment. Not only have the ultra-low rates been a market reality for a long period, there are also numerous new and younger CEOs have replaced retiring leaders and who have yet to manage a CU through such an environment.
Time Will Tell
“Time will tell on that matter,” said Long. “I will say that we are coming off a period of such strong loan growth for credit unions that coupled with a rising-rate environment, I think there are some credit unions stretched a little thin in terms of their liquidity situation. So, that might be a consideration for some. Maybe it will just be a good opportunity to rebalance their balance sheet.”
Long noted again that all of that has contributed to the record decline in the Credit Union Sentiment Index.
“I think credit unions are just getting accustomed to a new environment, as they adjust to a period of rising rates and lower loan demand,” said Long. “I suspect we will now see the CUSI level off, and stay pretty much where it is at for a while.”