Performance Analysis the Key to Greater Loan Growth for Credit Unions
By Michael Cochrum, CU Direct
Credit unions have been celebrating success from Bank Transfer Day, which triggered a rise in credit union membership over the last 18 months. But has the success in attracting new members translated into an increase in loan market share? The numbers are somewhat disappointing. While there has undoubtedly been a rise in loans on credit union balance sheets, credit unions have not benefitted from the sharper increase in loan demand. In fact, credit union loan market share has actually dropped by 25% since 2007.
2007 Penetration by Lender Type
As you are more than likely aware, the lending landscape was much different in 2007. In fact, household debt was increasing annually at a brisk pace; much of it driven by an increase in mortgage lending running up to the late 2008 meltdown. For a time in late 2008 and early 2009, credit unions began to increase their share of auto loan originations achieving shares of over 30%. However, many large credit unions on the East and West coasts were also caught up in the “second wave” of the mortgage loan meltdown as property values began to decrease dramatically in the wake of defaults and foreclosures.
The retreat from risk, prompted by uncertainty in the credit union system, a faltering economy and increased regulatory scrutiny, squelched what otherwise would have been an opportunity for credit unions to capitalize on the misfortune of their competitors and to do what they do best: lend money to their members.
2012 Penetration by Lender Type
While consumers still tend to be skittish, they are buying houses and cars again, as pent up demand begins to release as the economy is slowly growing out of the recession. The problem is that credit unions have not responded quite as quickly as banks to the changes in loan demand. While credit union loan growth was strong in 2012, up almost 4.6% from December 2011 to December 2012, bank consumer loan growth was stronger during the same period.
YoY Loan Growth
How can this be, especially when so many consumers have become more aware of the advantages of credit unions? The answer is that borrowers don’t shop for lenders the way they shop for a place to deposit money. When consumers borrower money, they are more likely to be led to a lender than seek one out. For the majority of loans, consumers never enter a financial institution. Credit cards come in the mail, auto loans are originated at a dealership, and those selling home repair or improvements usually provide the consumer with a ready financing option. There are even online sources that offer short-term financing for the purchase of travel tickets and other online purchases. In fact, when a consumer pursues their own financing today, it typically slows down the purchase process.
Credit unions, in general, have been reluctant to seek out borrowers through these point-of-purchase channels. The main reason has to do with a familiarity for these markets and well documented, disastrous forays by fellow cooperatives in the past. But, it’s important to keep in mind that the past does not necessarily have to define the future, especially if the causes of failure can be identified through analytics and the risks mitigated by regular monitoring.
The key difference between credit unions and their competition is not necessarily that the credit unions are more conservative in their approach to lending or that banks are able to ignore the mistakes of the past more easily than credit unions. The key seems to be that banks are more equipped to use their own internal data to drive decision making. In fact, 97% of non-credit union businesses today that offer credit to consumers are currently using or plan to use customer performance data in the next 24 months to inform future engagements with their current and prospective customers. Further, 57% of those businesses plan to increase their investments in technology and expertise over the next 12 months to better understand client behaviors in order to anticipate changes in risk, adoption, satisfaction and retention. For credit unions to regain lost market share, they have to consider the value of their own data in building strategies for future growth.
Credit unions have been encouraged to analyze loan performance data by regulators to identify risks of loss in the portfolio and to isolate risk pools that should receive management focus to mitigate the risk. However, that same performance data is important for identifying opportunities for the credit union to regain market share. For example, there are many credit unions that do not lend money to members for recreation vehicles such as boats, motorcycles and motorhomes because of high losses taken on these types of loans in the past. But, if the credit union were to analyze those portfolios from the past, it is quite possible that there were certain risk factors that were not identified or managed properly that caused a majority of the higher than expected losses. If those factors can be isolated, the credit union can re-enter the market with greater success.
Another important factor in growing a loan portfolio is retaining borrowers. By monitoring portfolio performance, it’s easy to see when members are re-financing their loans due to pricing, trading in vehicles to purchase new vehicles, and it’s also easy to monitor fluctuations in credit line utilization as that credit line ages. Of course, preventing a loan from charging-off is still another way of retaining a member loan, and falls in line with the credit union value proposition. Credit unions care about their members. If emerging delinquency and loss trends are spotted early enough, future losses can be averted and the credit union can provide a mutually beneficial path to resolution for the credit union and its member.
