Setting your credit union up to thrive through Q3-4 2022

We experienced an interesting first quarter of 2022. Between recovering from further pandemic disruptions following the Omicron surge, Russia invading Ukraine and the West imposing harsh economic sanctions, historic rises in oil prices, inflation, and the cost of virtually everything increasing, the U.S. economy has been on a tumultuous ride.

In Q2, we are transitioning back to a more sustainable or normalized growth rate, which means credit unions will need to adjust with the changing conditions. In this article, we will provide action items for credit unions to set themselves up for success through Q3 and Q4 2022.

Economic Outlook: Q3-Q4 2022

With the economic recovery from COVID-19 all but complete, we are undoubtedly witnessing a deceleration in the U.S. economy in 2022. In the labor market, the unemployment rate has essentially regained its pre-pandemic level at 3.6%.

Despite an expected weak Q1, we expect annual GDP growth to be slightly stronger at 1.5-2.0%.

Here’s what to expect for GDP growth in 2022 broken down by quarter:

• Q2 will improve slightly to 1.7-2.2% (inflation will hold down growth)
• Q3 will likely be 2.0-2.5% (we expect to see improvement in prices and supply chains)
• Q4 will slow to 1.5-2.0% (a tighter monetary policy and labor market will slow us down)

For reference, the U.S. Congressional Budget office puts the long-term growth potential for the U.S. economy at about 1.8%. In other words, the economy is returning to this longer run rate.

Risks to this economic outlook are not balanced with greater risk to the downside, so any revisions will likely be downward. Overall, we put the odds of recession over the next 12-18 months at around 35%.

Action Items to Set Your Credit Union Up for Success in Q3-4 2022

Risk Management

Consumers are experiencing increased pressure due to negative real wages and a decline in savings. This means they will become more vulnerable to getting into arrears on debt payments and insurance premiums.

Robust monitoring, developing relationships with members with positive communication strategies, vigorous collections efforts, streamlined resolution practices for foreclosure and repossession, and increasing loan reserves will serve credit unions well in the increasing risk climate.

Furthermore, efforts geared toward monitoring and mitigating interest rate risk will be critical given the current rising interest rate landscape, which will likely involve monitoring and addressing interest mismatches between liabilities and assets as well as interest rate hedging, when possible.

Non-interest Income

Loan demand is softening while margins remain tight. As such, credit unions will want to continue exploring alternate sources of generating income. Recent efforts by the Consumer Financial Protection Bureau (CFPB) and policymakers aimed at eliminating NSF and other “junk” fees may make this even more imperative. Credit unions will need to get creative in finding new income-drivers.

Automation

Automation is likely to remain a theme for credit unions for a decade or more. With labor markets still tight across the country, credit unions will need to consider not only automating, but also finding the most cost-effective and member-friendly solutions needed to retain their competitive advantage. As a result of increased automation, more robust cyber security and use of data analytics will become necessities. 

Outsourcing

Credit unions will also want to consider outsourcing more labor-intensive efforts either onshore or offshore. Due to the dwindling supply of labor in the country, employers in every sector will need to source talent where they can find it. This may involve outsourcing labor from other states or offshore/nearshore where costs are relatively lower.

Conclusion

With loan demand naturally softening from record levels in 2020 and 2021, credit unions will need to look for alternative sources of revenue from non-interest income. To aid your organization in these efforts, SWBC is pleased to introduce healthCAR—a new way for members to protect their vehicle after their manufacturer’s warranty expires. It’s a no-nonsense, affordable, month-to-month, vehicle extended warranty that can help your credit union generate non-interest income on direct and indirect borrowers, members with auto loans at other institutions, recently paid-off loans, and members with vehicles past the manufacturer’s warranty. Click here to learn more.