As credit unions across the country close the books on Q3, at Olden Lane, we are paying extra attention as the 5300 data trickle in. Perhaps more than in any recent quarter, this batch of returns has the potential to signal the economy’s overall direction. In fact, this quarter’s numbers will go a long way toward resolving whether the years-long trend of deposit growth and greater still loan growth can continue. And, in our opinion, the answer to that question will have a profound effect on how credit unions manage their affairs going forward.
In every single quarter since June 2013, the credit union industry’s loan growth has outpaced its share growth. See Chart 1, below. In fact, from Q2 2013 through last quarter, the industry’s annual loan growth averaged 9.6%, while share growth could only manage 6.3% growth.
These relative growth rates have had pronounced effects on the balance sheets of the nation’s financial institutions. The industry-wide credit union loans-to-shares ratio of 66% in 2013, for example, steadily increased over the past several years before topping out at 85% at YE 2018. See Chart 2, below. The 85% level is the highest that the loans-to-shares ratio has been in the 40 years that it has been reliably tracked.
During this time, credit unions have also become more regular borrowers at the Federal Home Loan Bank. To support the impressive loan growth that accompanied the economy’s expansion, total FHLB advances from the credit union industry grew from $26.9 billion at YE 2013, to $57.7 billion at YE 2018.
The past two quarters’ data, however, have indicated a real softening. And so, we are looking to the Q3 numbers to settle whether the first half of 2019 represents an anomaly or a significant pivot in the direction of the nation’s economy. As we first suggested in May, there is growing evidence that loan demand might be decelerating. And, that the loans-to-shares trendline might be breaking. Anecdotally, we have heard from many clients – across all parts of the country – that loan demand has slowed dramatically. One CU executive on the West Coast recently commented that his loans have “fallen off a cliff” and he doesn’t know why. He added that “we aren’t doing anything differently, either.” According to Callahan data, the loan growth in Q1 (8.42%) and Q2 (6.98%) represents the lowest quarterly growth numbers since the end of 2013. At the same time, deposit rates have been climbing steadily for each of the past four quarters, suggesting that consumer confidence might, in fact, be waning.
There are plenty of explanations as to why the economy might be slowing. And, in the aggregate they are quite convincing. In just the past several weeks, we have added impeachment talk, a WeWork debacle, and repo market pressures to a list that already includes strained U.S.-China relations, trillions in negative yielding fixed income, a slowing European market, civil unrest in Hong Kong, and an inverted yield curve.
The Federal Reserve Bank of New York creates a recession probability model based on the spread between the 10-year and three-month Treasury yields. The complied data is used to predict the likelihood of a recession in the next year. The model is typically updated at the beginning of each month. With the last release, on September 4, the index suggested a 31.5 percent chance of a recession by August 2020.
We expect that this quarter’s 5300 data will give us a better view into just how likely such a scenario is.