By Ray Birch
SAN ANTONIO—Credit unions need to brace for a lighter lending year, while at the same time ensuring their collections operations are running well because delinquencies will begin to tick up, says one expert, who adds 2022 will be a “risk management year if there ever was one.”
Those are observations from SWBC’s Blake Hastings, who spoke with CUToday.info about trends credit unions need to watch in 2022.
Hastings, SVP, Corporate Strategy and Chief Economist, also shared his insights during a recent SWBC webinar, and they can also be found in this white paper.
“Credit unions will definitely see loan demand cool off, just a little bit, particularly for mortgages,” said Hastings. “Consumer loans in particular, and that's just a combination of several things happening there. Number one, you've seen home prices appreciate pretty rapidly and now interest rates are going up. You can expect loan demand to cool. Additionally, you've got the consumer under a little bit of pressure, as ironic as it is to say with wages going up almost 5% year over year, but that's being more than eaten up by inflation. The consumer balance sheet's actually deteriorating right now.”
Government stimulus funds, too, are fading in consumers’ bank accounts, added Hastings, which raises concerns about delinquencies.
“I would also expect delinquencies to pick up. I'm not suggesting they're going to go up a great deal, but they will increase from their record low levels,” he said. “But you will definitely see delinquencies come off the mat and you're definitely going to see some deterioration in auto loan quality.”
‘They Won’t Hold’
Hasting expressed concern for the high prices of used vehicles that could begin to fall this year, leading to problems with negative equity on used autos purchased within the 12 to 24 months.
“Those used car prices are extremely high and they won’t hold,” he said. “I think as supply chain issues get corrected, over the course of this year and early next year, you're going to see more and more inventory of new cars come into the market. And that by definition will provide consumers an alternative and could put some downward pressure on those elevated used car prices. You have the combination of the consumer balance sheet deteriorating a little bit combined with used car prices eventually going down—that’s something to watch, especially if you're a financial institution that does a lot of consumer lending in the auto space.”
Hastings emphasized he does not think the depreciation of used car values by itself will cause delinquencies to go up.
A ‘One-Two Punch’
“I think delinquencies will go up because they've been artificially low,” he explained. “A lot of that artificial low has come from government stimulus. That, now combined with the fact that real wages are actually are going down right now (due to inflation), it’s a one-two punch. And, if you took out a 72-month loan on a used car you bought at the peak of these prices, chances are you're going to be upside down for a long time. And, yes, you could see some people walk away from those loans.”
Hastings said credit unions are going to have to bolster their collections practices.
“The delinquencies won’t be at the scale and magnitude we saw during the 2008 financial crisis,” Hastings said. “But credit unions should have the right protections in place. They're going to have to make sure their collections operations are ramped up and ready to go. And, they're going to have to be ready to repossess vehicles.”
Slowing Demand
CUs, as well, should expect loan demand to slow.
“Loan demand won’t drop through the floor, but it will cool off,” Hastings said. “Couple that with interest margins getting further squeezed—if the Fed goes through with what could be at least three rate hikes next year…You're going to see the yield curve flatten a little bit. It's not going to flatten all the way or invert, which would foretell a recession, but it is going to flatten out a little bit. Combined with lower loan demand and tighter interest margins, financial institutions are going to have to look more to non-interest income. They're going to have to look to fee-based income and other ways to keep their revenues rolling in.”
But as CUToday.info is regularly reporting, more financial institutions are moving to eliminate or lower one of their largest fee-income sources, overdraft charges, including credit unions.
A Greater Emphasis
Hastings said that will place greater emphasis on additional non-interest income sources, such as insurance products. He emphasized GAP insurance will help CUs protect their collateral during a period in which repossessions could rise.
“I think it's a risk management year if there ever was one,” said Hastings. “With interest rates moving up, particularly on the short end of the curve, I think financial institutions are going to have to be concerned about interest rate risk, which is banking and credit union school 101. You're always managing your interest rate risk, but that's going to be especially difficult in a year where you've got rising interest rates on the short end of the curve and the long end of the curve, going out 10 years or more, those aren't necessarily going to respond as strongly. I think interest rate risk is something financial institutions are really going to have to manage this year.”