The global economy continues to feel the effects of the coronavirus. Through the second quarter, economic shutdowns created financial uncertainty among members and credit unions alike. Despite the turbulence, financial markets regained early-year lossesin the second quarter. The Dow Jones Industrial Average increased 17.8% from the end of the first quarter to the end of the second, buoyed by record low interest rates as the Federal Reserve worked to counter pullbacks in consumer spending. However,the low rates, combined with increased deposits and low consumer loan demand, resulted in compressed margins and increased revenue pressure at financial institutions nationwide.
Key Points
- Total revenue for the credit unions industry increased 2.2% year-over-year to $41.1 billion through the first six months of the year.
- Interest income increased 1.4% year-over-year to $30.8 billion through the first six months of 2020. Non-interest income increased 5.2% annually to $10.9 billion, largely from 121.1%growth in year-to-date mortgage sales to the secondary market.
- Operating expenses increased 6.9% annually to $25.5 billion year-to-date. This is the highest expenditure through June 30 on record.
- Despite decreasing 57 basis points in the past year, the industry’s capital ratio remains relatively high at 11.2%.
NET INTEREST MARGIN VS. OPEX
FOR U.S. CREDIT UNIONS | DATA AS OF 06.30.20
Callahan & Associates | CreditUnions.com
The net interest margin decreased 30 basis points over the year to 2.89%. This is the largest annual decrease since the first quarter of 2003.
YTD REVENUE AND ANNUAL GROWTH
FOR U.S. CREDIT UNIONS | DATA AS OF 06.30.20
Callahan & Associates | CreditUnions.com
Fee income decreased 9.7% annually to $4.0 billion as of June 30. This is the least income generated from fees through the first half of the year since 2016.
RETURN ON ASSETS
FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.20
Callahan & Associates | CreditUnions.com
ROA is down 40 basis points year-over-year and up 5 basis points from last quarter.
The Bottom Line
The economy closed for a large part of the second quarter, and the Federal Reserve kept interest rates at all-time lows. Consequently, financial institutions had to develop creative strategies to generate revenue. Income growth slowed in the second quarterwhile operating expenses increased. As such, ROA remained low despite increasing 5 basis points from the first quarter. Part of the expense increase can be attributed to credit unions allocating more into provision accounts. Nationwide, provisionfor loan loss increased 51.4% to $4.9 billion as the industry prepares to fight the economic onslaught of COVID-19.
This article appeared originally in Credit Union Strategy & Performance.
