From data to decisions: Geopolitical insights and predictive forecasting for credit unions

In an increasingly interconnected world, geopolitical events have a significant impact on global financial markets, which undoubtably includes credit unions. These events, such as political upheavals, regulatory changes, and economic fluctuations, can create both opportunities and risks for credit unions. By using geopolitical insights as a catalyst, credit unions can leverage predictive forecasting to stress test and make informed decisions.

Imagine this, using recent events for comparison, how would you have planned differently had you anticipated the potential impacts of the pandemic, global shutdowns, supply chain disruptions, inflation, member trends, banking collapses, and history-making interest rates?

Current state

As reported by Callahan on their Q1 Trendwatch 2023 webinar:

• Year-to-date loan originations in the first quarter declined by 29.5% to $135.7 billion, compared to $192.3 billion in the first quarter of 2022
• Real estate loan originations shrank by 43.6% and non-real estate originations fell by 18.2%
• Rising prices of homes, cars, and interest rates are putting pressure on potential borrowers
• The average price of a new car in March was nearly $48,008, which is 20% higher than the average price in March 2019

In the first quarter, the allowance for loan and lease losses, which is set aside to cover potential losses on loans, increased significantly to reach 1.13% of outstanding loans. Credit unions took this measure due to the implementation of the new CECL (Current Expected Credit Losses) charge-off methodology, ensuring they have enough coverage for loans that may not be recovered. The rise in allowances resulted in a coverage ratio of 215.4%, meaning that more than double the potential amount needed to cover delinquent loans is now allocated. This increase in allowances reflects a worsening asset quality across the credit union industry.

Credit unions have been experiencing exceptional membership growth over the past five years, with a 4.4% increase year-over-year and the addition of 5 million new members in the last 12 months. In this report, we see 12-Mo. Growth at 11.6% with the average loan balance per member having risen by over $1,100 which indicates increased borrowing activity but it’s somewhat misleading. YTD Loan Originations and Annual Growth show that loan originations are down 30% from last year. Real estate and consumer lending show a 29.5% decline in origination dollars. There has been a notable decline in the average share balance per member by nearly $400. This suggests that savings have been difficult for many Americans, possibly due to economic challenges or reduced personal income. Despite the growth in loans, the decline in savings highlights the financial struggles faced by individuals in maintaining their savings within the credit union setting.

Fear not, it’s not all doom and gloom. Additionally, Callahan reported that the credit union industry is experiencing a positive trend in net interest margin, which is exceeding the growth rate of operating expenses. This provides the industry with greater financial flexibility and reduced dependence on non-interest income.

Inputs and opportunities

Understanding geopolitical dynamics:

Geopolitical dynamics shape the economic environment in which credit unions operate. Factors such as trade policies, international conflicts, and regional alliances impact interest rates, currency values, and market stability. Credit unions need to stay abreast of these dynamics to effectively manage risks and seize opportunities. Geopolitical insights provide a broader perspective, allowing credit unions to adapt their strategies and policies accordingly.

Risk assessment and management:

Predictive forecasting plays a crucial role in assessing and managing the effects of geopolitical risks for credit unions. By analyzing historical data, market trends, and geopolitical indicators, credit unions can develop models that assess the impact of geopolitical events on their operations. These models enable credit unions to identify potential risks, quantify their likelihood, and develop appropriate risk management strategies. For instance, predictive forecasting and stress testing can help credit unions anticipate the impact of supply chain issues resulting from economic sanctions or inflation and interest rates on their loan portfolios or investment portfolios from political instability.

Member behavior analysis:

Understanding how global and local events influence member behavior is vital for credit unions. Predictive forecasting can analyze member data, including transaction patterns, account activity, and demographic information, to identify correlations between events and member behavior. One example of behavioral analysis would be, during periods of economic uncertainty, members may exhibit changes in savings patterns, loan demands, credit card utilization, or investment preferences. By leveraging predictive forecasting, credit unions can anticipate these shifts and proactively tailor their services to meet member needs.

Pricing and product development:

Global political analysis can inform credit unions’ pricing strategies and product development efforts. By incorporating predictive forecasting into these areas, credit unions can assess the potential impact of geopolitical events on the cost of funds, interest rates, and loan delinquency rates. This knowledge can help credit unions determine appropriate pricing levels for loans, deposits, and other financial products. Additionally, predictive forecasting can identify market gaps or emerging demands resulting from economical, and member developments, enabling credit unions to introduce innovative products or services.

Market expansion and diversification:

Combined with international strategic understanding, data analytics, and forecasting can guide credit unions in their market expansion and diversification strategies. By understanding the dynamics of different regions, credit unions can identify countries or markets that offer growth opportunities or present lower risks. Predictive forecasting can assess factors such as political or geographic stability, regulatory frameworks, and economic indicators to evaluate the viability of entering new markets or reducing market share in other areas. This knowledge enables credit unions to expand their footprint strategically while managing potential risks.

In today’s interrelated world, credit unions must proactively monitor and respond to global developments. Predictive forecasting serves as a powerful tool to gain insights into these dynamics and effectively manage risks and opportunities. By leveraging predictive forecasting, credit unions can enhance their risk assessment and management practices, understand member behavior, develop tailored products and services, and strategically expand their operations. Embracing the understanding of geopolitical insights as they relate to predictive forecasting helps to empower credit unions to navigate the complexities of the global landscape while providing optimal value to their members.

About Allied Solutions

Allied Solutions is one of the largest providers of insurance, lending, risk management, and data-driven solutions to financial institutions in the US. Allied Solutions uses technology-based solutions customized to meet the needs of 4,000 banks and credit unions, along with a portfolio of innovative products and services from a wide variety of providers. Allied Solutions is headquartered in Carmel, Indiana and maintains several offices strategically located across the country. Allied Solutions is a wholly owned and independently operated subsidiary of Securian Financial Group.