Latest / Market Pulse / How Credit Unions Can Succeed in an Uncertain Economy
Transcript
- katherine doe: Welcome to the Market Pulse podcast. I'm your host, Katherine Doe, a product marketing director here at Equifax for our risk portfolio. Our episode today is a compliment to our March 16th Market Pulse webinar about how credit unions are adapting to economic uncertainty. Mike Schenk was one of our featured guests for that event and he joins us again today on this platform. Mike is deputy chief advocacy officer for policy analysis and chief economist for the Credit Union National Association or CUNA. We'll discuss the risks and opportunities that may be lying within portfolios, and we'll answer many of the questions our webinar audience submitted last month. But before we begin, let's get a brief economic update from David Fieldhouse, Director of Consumer Credit Analytics at Moody's. All right. We good, Renee? Alright. second to change my papers. Okay, thanks David and Mike, welcome. Thank you again for coming back with us today. We might as well just jump right in and get started. Our webinar audience said that their top priority is to better understand the risks and opportunities in their current portfolio. So I'm curious, what advice do you have for them and where should credit unions focus their resources at this particular time? Mike Schenk: That's a great question and before I get into that, I just did want to make it clear that our outlook at CUNA roughly aligns with the Moody's outlook, which I think is really important because we do feel like the Federal Reserve has engaged to a pretty significant extent. More than a million and a half people will be put out of work if the Fed has its way. rate will drift up from about 3.6% today to over 4.5% in our estimation. So the environment is tough and it's I think the challenges are compounded both by what happened with Silicon Valley Bank and potentially with what may happen with the both the debt ceiling and the budget situation arena. The effect of that from a rate perspective is estimated to be somewhere in the neighborhood of 125 basis points higher, which could be pretty impactful and again is substantially more impactful than what the Fed has cooked into its baseline forecast. So that's a big deal. not-for-profit and they're member-owned and democratically controlled. And that's really important. We talk about it all the time, but we don't really talk about what that difference is when the rubber hits the road a lot. But it's especially important during economic disparity, economic dislocations and challenges. In the for-profit sector, services companies have an obligation, actually a legal obligation, a fiduciary obligation to protect shareholder value. And that means in an uncertain environment on the margin, those for-profit institutions are more likely to turn people away who might cause an erosion in that shareholder value. On the other side of the coin, credit unions, because we're member-owned and we're focused our members, not maximizing profits, but maximizing service to members, we enter those situations, and actually our CEO likes to call credit unions financial first responders. And the reason is, in these situations, it's just in our DNA to interact with people and to try to get them through difficulties sooner than they otherwise would, through those thoughtful conversations the extension of help even though it might be a little bit riskier to interact with people. So that's kind of the cool superpower that credit unions katherine doe: Thank you. Mike Schenk: have. And so I would say, you know, just do what you've done in the past during difficult times. Continue to have those conversations. Continue to serve people. You've got to be a little bit more careful. There's no question about that. because you want to protect capital is not what we're all about. And every credit union director, I think, needs a reminder of that as we go into these tough situations. It's not a super comfortable feeling to watch capital erode, but that's why we were chartered. We were chartered during the by embracing people who are turned away elsewhere. That's the big opportunity. And actually, I've lived through probably three or four big crises, starting with the savings and loan crisis in the 1980s. And at the tail end of every one of those crises, we see really strong membership growth at credit unions because credit union members appreciate the way they're treated in these environments. They tell their friends about credit unions credit unions on the tail end of these big dislocations. So kind of a long way of answering your question, but I think that's the opportunity. In terms of the challenges, katherine doe: Mm. Mike Schenk: I would say, you know, the canary in the coal mine, at least from my perspective, is what's happening with credit cards. That's part of the reason that we've purchased the Aquafax database. is a 10% sample, so we have, I think it was back to 2005, so we have 28 billion records, and I think two billion new records every year. And so we can see behaviors in the marketplace, and we can differentiate between credit union members and non-members, and we can see in the data that credit union members are really more resilient than non-members for a variety of reasons. But the first place I look is credit card portfolios. katherine doe: Mm. Mike Schenk: the volume of business, how are those portfolios growing? And whether the growth is completely new growth, like balances that have gone from zero to some other significant number, or if it's revolvers that are just adding to that pile of debt that they already have. in terms of potential hiccups, that's my starting place. And I do want to see, you know, how are the trans actors behaving? Are they still trans actors or are they becoming revolvers? And I want to look at that across the credit spectrum. And I'm especially of course concerned with those on the bottom rungs of the credit spectrum. katherine doe: And so you consider credit card to be the first place to look because, you know, literally in a consumer's wallet, that's the first thing they'll grab if they're struggling in other areas. Am I connecting those dots? Mike Schenk: Absolutely, yeah. The more likely it is that somebody is having a tough time paying their bills, the more likely that they're going to be accessing that particular. katherine doe: Gotcha, thank you. And I appreciate your reminder and the distinction between credit unions and other types of financial institutions. I started my career in credit unions, so it's always nice to have conversations like that and a reminder on how they were charted and why. So, switching gears just a little bit, maybe you can tell us some more about the latest trends within credit union operations and what you're seeing in terms performance right now. Mike Schenk: Yeah, actually, let me just make one comment from the economic perspective. katherine doe: Sure. Mike Schenk: Start with the economics and then I'll go to the katherine doe: Yeah. Mike Schenk: credit union economics essentially. So one of the really interesting things about the environment we're in today where we're expecting a pretty significant slowdown, mild in the grand scheme of things, but noticeable for a lot of people. is that the starting place for most consumers today is unlike the starting place in previous economic downturns. So at the moment, for example, in general, on average in the consumer sector, people don't have much in the way of debt. We have been in a general household deleveraging event since the Great the financial crisis in 2008. In 2007, the dollar amount of debt in the household sector as a percentage of take-home pay was 125 percent, and that has come down steadily over time, and it's now about 90 percent. And that, so that is a level that was obvious pre-pandemic, and it's equal to where it was, I think, back in 1990. So it's a substantially lower pile of debt relative to income. More importantly, perhaps, Federal Reserve tracks the debt payment burden. So this is the monthly obligation that people have that they've embraced as they've taken on debt as a percentage of take-home pay. So how much of their take-home pay is used to satisfy debt obligations? data points are showing us today is that the number has never been lower. It was a substantial and very important event when rates were very close to zero and millions and millions of consumers refinanced their mortgages and folded in a lot of the high rate debt that they had outstanding into those refinanced mortgages that were by and large katherine doe: Mm. Mike Schenk: rate, right? katherine doe: Mm-hmm. Mike Schenk: So if you look at the Federal Reserve data, and they've been looking at this, tracking it since 1980, if you look at that data, the current reading on that, the last one I looked at, is the lowest it's ever been, abstracting from the COVID crisis. There was a big blip down during the COVID crisis katherine doe: Mm-hmm. Mike Schenk: because of the $7 trillion in fiscal assistance. So katherine doe: Mm-hmm. Mike Schenk: incomes went up a lot, effect caused that ratio to go down even lower than it is today. But abstracting from the middle of the COVID crisis, the reading today is lower than any reading that we saw pre-COVID all the way back to 1980. katherine doe: Hmm. Mike Schenk: So that's great. I mean, katherine doe: Yeah. Mike Schenk: I think, and net worth, if you look at net worth, so that not just the debt, but assets, the net worth overall at the moment in the household sector is about annual household income. And katherine doe: Mm. Mike Schenk: that's not a record, but it's very, very close to a record level. So consumers are in great shape. And so by extension, credit unions actually are in great shape as well. Our balance sheets are solid and we're earning at high rates. ROA, net income as a percentage of average assets for credit unions in 2022 was 88 basis points, That's a solid reading from a historical perspective. And from a balance sheet perspective, our net worth ratios collectively, 10.7%. Our regulator says 7% is equal to well capitalized. katherine doe: Hmm. Mike Schenk: So our capital buffers are quite large. That's net worth. So that's the reserves and undivided earnings essentially. When you take into account unrealized losses in portfolios, because that was a big deal for example, katherine doe: Yeah. Mm-hmm. Mike Schenk: all financial institutions do have some unrealized losses because all financial institutions have fixed income portfolios. We adjust for those and we look at the equity capital ratio. It's very close to 9%. So that's katherine doe: Mm. Mike Schenk: a two percentage point buffer over what the regulators consider to be well capitalized. Getting back to the consumer sector, because earlier, our asset quality statistics are near all-time lows. Now, both delinquencies and net charge-offs have been coming up a little bit, but they're below long-run averages and they're not, you know, rising to the level that we would typically see prior to the beginning of an economic downturn. They're actually quite low. And So the delinquency rate at the end of 2022 came in at 61 basis points, 0.61%, and the net charge off rate was 0.34%. And katherine doe: Mm. Mike Schenk: what that means is that, of course, that means that 99.7% of credit union members are paying their loans back. katherine doe: Yeah. Mike Schenk: we've got a lot of liquidity in the system, a lot of access to liquidity. Cash and cash equivalents are over 10 percent, very, very close to pre-pandemic levels. And, you know, from what we can tell, there's been a bit of an increase in longer-term assets, but not substantial. And so, the interest rate risk exposures seem to be about where they were pre-pandemic. katherine doe: Okay. Well, let's get to one of the webinar audience questions or comments. It sounds like we saw their top priority is to better understand the risks and opportunities that are potentially within their current portfolio. So I'm curious what advice you might have. And I think you gave us a little bit of what the leading indicators are Um, but, uh, how, how might that change, um, um, credit unions and, and any potential member decisions that they're making along the way. Mike Schenk: Yeah, I think we already covered most of that, didn't we? That was katherine doe: Did Mike Schenk: the katherine doe: we? Mike Schenk: first question. katherine doe: We Mike Schenk: I katherine doe: can Mike Schenk: think katherine doe: skip Mike Schenk: that was, katherine doe: that one. Okay. Mike Schenk: I think that was the first question you asked, actually. katherine doe: Okay, all right. I'm just reading through to make sure we're not being duplicative here. Okay, this is a good one. So Mike, you mentioned the recent Silicon Valley Bank issue, we'll call it. What if any implications are there for credit unions related to bank failures and what advice might you give to members or those running credit unions? Mike Schenk: Well, I think a couple things. One, just my starting point is similar to what I was saying earlier. Credit unions really are different in the marketplace katherine doe: Mm. Mike Schenk: and it shows up over time. For example, the FDIC has operated in the red on two separate occasions, each time for two consecutive years. As you know, there was an insurance fund that supported the savings and loan industry in the 1980s that went completely bankrupt. It doesn't exist anymore. If you look at credit unions over the last 30 years, our insurance fund has been funded at $1.30 per hundred in insured savings over that entire period of time, $1.20 or higher over that entire period of time. it really does reflect an industry that not only stays engaged, but does so in a careful manner. The research that we have, we've done quite a bit of academic research on this topic, and again, structure matters, and incentives matter, and what we know is that in the for-profit sector, not just CEO compensation, but executive compensation tends to be tilted more dramatically towards high-powered compensation, variable pay for performance. And when you have that type of an incentive structure, you're more likely to be swinging for the fences. katherine doe: Mm. Mike Schenk: And so that doesn't happen at credit unions because of the different incentive structure katherine doe: Mm-hmm. Mike Schenk: and the fact that, you know, our credit union members are our owners. So katherine doe: Great. Mike Schenk: we're very careful about not doing bad things to our members. katherine doe: Hehehe Mike Schenk: really impactful. Other than that there's some other structural things that come into play. So for example if you were to look at the average amount of insured deposits at a credit union the average is about seven thousand dollars. At banks collectively I believe the average is about fourteen thousand dollars. Now you know FDIC insurance, federal insurance for both credit unions and banks is generally per account. So those are quite, those readings are quite low. If you though look at, for example, regional banks, the number is much closer to $170,000 on average. So that's getting you pretty close, the average pretty close to that 250 max. SVB, Silicon Valley Bank, was at $1.25 katherine doe: Mm. Mike Schenk: that had self-reported a deposit of $3 billion. katherine doe: Oh. Mike Schenk: That greatly exceeds the $250,000 katherine doe: Mm-hmm. Mm-hmm. Mike Schenk: insurance limit, right? So as it turns out, Silicon Valley Bank had 250, I'm sorry, Silicon Valley Bank had 95% of its deposits uninsured. It's basically the exact opposite unions, 92% or 93% of credit union deposits are fully insured by the federal government. And so when depositors at Silicon Valley Bank saw this situation, they wanted their money out, and they wanted it now. That's what essentially would cause the problem. That in combination with substantial unrealized losses in their investment portfolio, which made it difficult for them to liquidate assets who wanted their money. So completely opposite situation in credit union land katherine doe: Mm-hmm. Mike Schenk: but that doesn't mean it's not going to affect us. It's going to affect us katherine doe: Yeah. Mike Schenk: and the effect is that I think maybe two or threefold. One, more than likely we're going to see increasing regulation and supervision and especially those two things that I just talked about. Insured deposits and unrealized losses, katherine doe: Mm-hmm. Mike Schenk: director at a $6 billion credit union, every year at the beginning of the year, I get a letter from our regulator and the letter basically says, here are our supervisory priorities for the year. And near the top of that list coming in to this year was liquidity. So everybody knew that this was gonna be a big deal. I feel like it's gonna be a bigger deal now for any institution that has not been supervised be a situation. Supervisory authorities we can be really really careful about looking at exposures like the exposures that I just talked about. So that's katherine doe: Mm-hmm. Mike Schenk: one thing. Secondly I think that you know I don't know what's going to happen with deposit insurance generally but as you know there are a lot of different suggestions out there you know should the number be five hundred thousand dollars not two hundred fifty you know should people have access to to different types of funds, that's all gonna be examined. So there's a possibility that like it or not, credit unions will be sort of pulled into a depository insurance scheme where we're gonna pay more money for insurance, even though we probably don't need katherine doe: Mm-hmm. Mike Schenk: a heck katherine doe: Mm-hmm. Mike Schenk: of a lot more insurance. And so there could be costs associated with that. And I'm obviously very concerned about that. The other thing is, to this earlier is that there is, because of SBB, sort of an economic impact in that access and availability of credit is going to be a lot lower post-crisis than pre-crisis. And as I alluded to, some of the experts that have looked at this think that that, from an interest rate perspective, that the SVB situation resulted in maybe a 75 basis point increase in short-term rates or the equivalent of that in terms of access to credit. katherine doe: Mm-hmm. Mike Schenk: So yeah, it's regulatory and supervisory, it's bottom line impacts, and it's more than likely going to make it more difficult for people to get access to credit. katherine doe: Mm. So let's go back to you mentioned job loss, job market, what may be headed our way. Do you see that the job market will return to, quote unquote, normal, a minimum wage scenario or will an increasing number of small businesses potentially be forced to close doors? Mike Schenk: I mean, I don't think it has to be either or. I think, I don't think it's gonna go back to normal, but, and I do recognize that for a lot of smaller businesses, access to labor is a significant issue and especially affordable labor, right? It's difficult. I think what it's gonna mean for a lot of small businesses is that they're actually gonna have to bite the bullet to their customers, which is not an easy thing to do, not something that most small businesses get excited about, but I guess you know if you're looking for a silver lining, everybody's pretty much in the same boat. So I think that you'll see more and more businesses using that before they you know essentially decide to shutter their businesses. katherine doe: And so again, on the small business perspective, any pointers you may have in credit scoring in this economy, such as unsecured credit or losses projected for small businesses. Mike Schenk: Well, again, I think the good news is that if we're right, this more than likely will be a mild recession. So katherine doe: Mm-hmm. Mike Schenk: it won't look like the previous several that we've been through. And that should be really helpful. And I think, again, on the margin, I think what that means is that business owners should think in terms of, you're not going to have to do what you did in the past katherine doe: Mm-hmm. Mike Schenk: to muddle through. easier to remain engaged with a greater number of people, a wider variety of people from a credit score perspective. And, you know, doing that will have payoffs. Credit unions have experienced that all along throughout their history, which started, you know, about 100 years ago. So I think small businesses are in a better position in this downturn than in previous. They will find it difficult, small businesses will, I think, find it more difficult than their counterparts who are larger to themselves get access in this environment to credit. We already see that in the senior loan officer surveys that the Federal Reserve does. Banks are tightening and they're tightening especially noticeably for smaller businesses. That will be a challenge, there's no question about it. katherine doe: And so maybe we'll end on, which is always one of my favorite questions. You've given us a lot of great information here this afternoon, but what are you not being asked in any of your engagements? Or what are you not talking about enough you think that perhaps credit union leadership should be thinking about more? What would you advise them to not overlook? Mike Schenk: Well, I talk about it all the time. katherine doe: Oh, okay, good. Hehehe. Mike Schenk: I may not be asked about it, but I talk about it all the time. And it has a lot to do with what I've already talked about. And that is that organizations with purpose really do stand out in the marketplace. Credit unions have a distinct mission. It's actually in our chartering documents. It appears in the Federal Credit Union Act. And it basically says that credit unions to provide credit for provident and productive purposes and to encourage thrift, especially to those of modest means. So that's our mission. And katherine doe: Mm. Mike Schenk: that's a good starting point. It really does set us apart from a lot of other institutions, but it's not enough. katherine doe: Mm. Mike Schenk: You really need to have, so the mission actually has to do with, you know, who you serve and how, And your purpose really is around the difference that you make in the world. katherine doe: Mm-hmm. Mike Schenk: I think one of the weaknesses that credit unions have is they take the incredible things that they do, maybe not with a grain of salt, but they don't recognize that those things are unusual in the marketplace and that they're really, really impactful katherine doe: Mm-hmm. Mike Schenk: and they don't spend measuring them and then talking about them, not only with potential members, but with policymakers and with the press. katherine doe: Mm. Mike Schenk: One of the reasons actually that we've invested in the Aquafax database is to show, as I mentioned earlier, behaviors in the marketplace and how those behaviors differ between various groups of consumers. We especially want to shine a light on credit union members. use that to build out a narrative that we can use on a national basis to really celebrate that difference. katherine doe: Mm-hmm. Well, that's a great way to end, and I hope that our team is able to support you in what sounds like a really important and worthy goal and mission. Thanks again, Mike. If our audience would like to follow up with you or learn more about CUNA, how would you suggest they do that? Mike Schenk: Yeah, so the best way is to email C-U-STAT, C-U-S-T-A-T, at cunacuna.coop. And then everybody in my group will see it and we'll do triage on the questions. And even if I'm in an airplane, somebody will get back to those. So, katherine doe: Awesome, that's really kind of you, Mike. We appreciate it. For our listeners, if you enjoyed today's episode, please share with your colleagues and consider subscribing to our podcast. If you'd like to send us and our Equifax team any suggested topics or questions, please email us at MarketPulsePodcast at Equifax.com. And don't forget to register for our MarketPulse webinar series. You can do that at Equifax.com forward slash MarketPulse. You can also listen to previous installments of that webinar series, including the one we had Mike as our guest for last month in March. Also associated with Market Pulse, we provide exclusive economic and credit insights to help your business make more confident decisions. So I hope you'll visit our site to get more of that. And thank you all for listening and join us next time. Mike Schenk: Thanks, Catherine. katherine doe: Thank you. Renee, we good to go? Mike Schenk: Uh oh, katherine doe: Rene? Mike Schenk: we gotta do it all over. katherine doe: I said the full version in my introduction. I spelled it out as Credit Union National Association. Is that where your question was?