Many credit unions have started their budget and, similar to prior years, stress testing key assumptions should be an important part of the budget process.
Last year, we emphasized the importance of testing out different rates of loan growth. While that continues to be an important stress test to perform, provision for loan loss (PLL) and potential pressure on the cost of funds may need special attention this budget season.
The past few years of historically low PLL could be coming to an end as many credit unions have used up excess reserves or taken on more credit risk. Credit unions should understand the sensitivity of earnings and net worth when testing different levels of PLL.
Another recent trend that could change going forward is a continued reliance on cheap non-maturity deposits to fund future loan growth. There is danger from both an earnings and liquidity perspective in budgeting for the same checking and regular share growth experienced over the past several years. More credit unions have started increasing deposit rates of late as share growth has slowed while loan growth has increased. We encourage credit unions to stress test their ability to handle an increase in deposit rates or pressure from the cost of funds mix changing to more certificates and money markets.continue reading »