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The Economy and Alaska Credit Unions. Alaska Credit Union League Annual Meeting May 1, 2010 Bill Hampel, Chief Economist Credit Union National Association bhampel@cuna.coop. Economic Summary. We’ve survived the Great Recession Worst since the Great Depression, but not nearly as severe.
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The Economy and Alaska Credit Unions Alaska Credit Union League Annual Meeting May 1, 2010 Bill Hampel, Chief Economist Credit Union National Association bhampel@cuna.coop
Economic Summary • We’ve survived the Great Recession • Worst since the Great Depression, but not nearly as severe. • There have been wholesale changes in the financial system, and we’re not finished. • A “growth” recovery began last summer. The public will notice by summer.
Average = 0.40%
Lehman Brothers Collapse Bear Stearns Hedge Funds Collapse Average = 0.40%
Gross Domestic ProductQuarterly Changes at Annual Rates, Real Worst 2 Qtrs Since 1958 2011 2001 Recession 2008-2009 Recession Source: Commerce Dept
Repairing Household Finances • Three Huge Developments: • Two Related, Longer Term: • Savings Decline • Debt buildup • One More Recent • Wealth Declines • Home Values • Equity Prices
Feb 2019 = 3.5% Paradox of Thrift: at the household level saving is desirable – but if all households save all at once it is devastating to the economy… Source: BEA.
Household Debt OutstandingTo Annual Disposable Income Sources; Federal Reserve Flow of Funds, Commerce Department
S&P 500 Down 50%, Up 50%. Even?
Consumer Confidence1980 to Present Source: Conference Board, Index 1985 = 100
Latest: Apr 58 24
Non-Farm PayrollsMonthly Changes SA Unemp Rate: 9.7% 8.4 million jobs lost since Dec. 07 to Feb 2010 Latest: Mar 2009 Source: Federal Reserve Board
Non-Farm PayrollsMonthly Changes SA Unemp Rate: 9.7% January: -780k Source: Federal Reserve Board
Unemployment Rates and Recessions (Percent of Labor Force) March 9.7% Broadest Measure: 16.9%
Annual Percentage Change {Core Rate: 1.2} YTD March
Interest Rates 1988 to 2010 Latest: April
Treasury Yield Curves 4 2 3 5 6 7 8 9 10 1
Summary:2010 Economic Outlook • Freefall has ended • Modest growth will resume • Unemployment rate will only drift down • No near-term inflation pressures • Little change in short-term interest rates • Gradual upward pressure on long-term rates • Overall: a fragile low-growth economy • The economy could surprise!!
Credit Union Outlook Through 2010 • Faster savings and asset growth • Slower organic loan growth • But more growth than normal in recession • Continued higher than normal loan delinquencies and losses, likely peaked • Substantial downward pressure on net income • But, some opportunity for net interest income • Yield curve vs. asset mix (investment growth) • Falling net worth ratios
Credit Union Loan Growth (Annual % Change) March YTD, NSA Source: NCUA & CUNA Economics and Statistics
Credit Union Delinquency(Total Portfolio) Percent of Outstandings Source: NCUA, CUNA Economics and Statistics
Greater Delinquency Increases at BanksLoan Delinquency Rates Source: FDIC, NCUA & CUNA E&S.
Net Loan Chargeoffs(Total Portfolio) Percent of Outstandings Source: NCUA, CUNA Economics and Statistics
Credit Union Savings GrowthAnnual Percent Growth Percent Change March YTD, NSA Source: CUNA Economics and Statistics
Net Income to Average Assets Source: NCUA, CUNA Economics and Statistics
Net Income to Average Assets Source: NCUA, CUNA Economics and Statistics
Net Capital to Assets Percent Source: CUNA Economics and Statistics
Summary of effects on CUs • With but a few exceptions . . . • Credit unions are collateral damage to the financial crisis and recession. • Negative effects were neither caused by the CU, and are likely to be bottoming out. • Responses by CUs should therefore be restrained.
Suggested Credit Union Response • Within reason, let the capital cushion do its work • Avoid penalizing members with higher fees and loan rates, and lower dividend rates just to protect net income if capital is adequate. • Net worth more important than net income. • Rising delinquency and loan losses do NOT necessarily require major modifications in lending policies. • Adjust net income budgets, and monitor closely. • Tell members about share insurance.
Net Worth Ratios after 2 YearsDec 09 Ratio: 9.8%, ROAs: 2009: 40 bp, 2010: 60 bp All US Credit Unions
Net Worth Ratios after 2 YearsDec 09 Ratio: 8.3%, ROAs: 2009: 70 bp, 2010: 70 bp Alaska Credit Unions
A Word on the Corporate Situation • There will be significant losses in the WesCorp and US Central portfolios over the next one to five years. • The actual amount of those losses depends on the future course of interest rates, the economy, housing markets, and housing finance. • Therefore, what the losses will end up being is unknown, and unknowable. • Because it is unable to deal with this situation, GAAP is unacceptable. • NCUA proposed rule. • The future corporate system will change significantly to gain credit union acceptance.
The Potential Losses • $60+ billion in troubled securities • Mostly private MBS, some others. • Year ago, market losses would have been $20 to $25 billion, credit losses estimated between $6 and $18 billion, most likely $11 billion. • After $5 billion in corporate capital, $6 billion assigned to share insurance fund: 1% of insured shares. • Latest estimate of cost to share insurance fund: still around $6 billion.
Share Insurance Premiums • Corporate Stabilization: • For now, ~15 bp a year, declines with growth • Length depends on stabilization costs • Probably 6 years, BUT UNKOWN • Low yield on NCUSIF investments • Natural Person CU Losses • 5 to 25 bp? • Most likely: 5bp to 10 bp for two years • Bank Insurance Fund: • A lot larger hole to fill
A Tale of Two FundsNCUSIF vs FDIC Source: CUNA Economics and Statistics
A Tale of Two FundsNCUSIF vs FDIC Source: CUNA Economics and Statistics
A Tale of Two FundsNCUSIF vs FDIC Net of Corp Stab Source: CUNA Economics and Statistics