Don’t wait for the punch to hit. Honestly assess your credit union in these four areas today.
We have now entered year 10 of the recovery since The Great Recession, which is fairly unprecedented territory when it comes to an economic expansion. Many lenders in the industry have already been making preparations the last several years for the next recession. A variety of auto lenders pulled back their sub-prime lending as early as 2016 for fear of the next recession; sub-prime loans typically don’t survive a recession very well.
From past experience, some credit unions tend to be a little late to the party, so to speak, when it comes to preparing for a recession. We tend to be act like eternal optimists until we take a serious hit; I’m thinking of the famous Mike Tyson quote about everyone having a plan until they get punched in the mouth. Sometimes, as lenders, we’re in denial that the economy will ever take a breath and experience some contraction. For others, trying to squeeze every drop of loan growth out of the economy is of utmost importance; resulting collection problems are something to worry about next year. Frankly, this has never been a problem for me; I like to joke that I’ve predicted five out of the last three recessions.
For those realists who want to start preparing now, how can you be sure your credit union will ultimately be ready? I’ve seen too many unprepared credit unions suffer in a downturn in my 30 years in the credit union movement and, more importantly, heard of too many members affected as their credit union is more focused on fixing their portfolio than lending money. To evaluate your preparedness, honestly assess your credit union in these four areas:
- How much risk is on your balance sheet? The asset classes that will suffer the most in a normal recession are credit cards, unsecured loans and sub-prime auto loans. If these loan types have grown faster than your portfolio as a whole, you should be concerned how they’ll perform in the next downturn.
- How did your credit union’s loan portfolio perform during the Great Recession? Not that past performance is indicative of the future, but if you came through 2008-2011 relatively unscathed, you must have done something right! Certainly not being in a sand state is a positive. I’m not sure what the next recession has in store for Florida, Arizona, Nevada and California, but history has a way of repeating itself. These states are not likely to experience a catastrophic downturn in real estate prices again, but perhaps the next recession will impact these states a little harder from an unemployment standpoint.
- How much more prepared are you from a collections standpoint? Assuming we’ll get more of a “regular” recession, how has your credit union improved its collections and risk mitigation process? Without a doubt, we all learned what to do differently to mitigate potential losses from the Great Recession. Are you ready to turn on the process in the near future?
- How much did you relax your credit standards in the last five years? My sense is that there are a fair share of lenders who made the assumption that we won’t see another severe recession again for quite some time. Yet a “normal” recession can still have an impact on your portfolio. If I were to look into my crystal ball, the auto loan market could be really problematic in the next few years. Used car values were very high for quite some time, so your members “bought high” and, if you wind up with their car, you’ll “sell low.” In addition, so many used cars with higher mileage have been on the market compared to 10 years ago. Finally, take a look at the composition of your consumer loan portfolio: Has your percentage of B, C and D loans grown significantly in the last five years? How does that distribution look compared to 2014? While B and C loans are not sub-prime loans, they still can generate significant losses.
CUES member Bill Vogeney is chief revenue officer and self-professed lending geek at $5.5 billion Ent Credit Union.