ROA RETURNS TO NORMAL
FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.22
Source: Callahan & Associates
Credit union industry earnings are stabilizing after historic fluctuations in the past two years. First quarter year-to-date return on assets (ROA) is down 17 basis points from the first quarter of last year, which was a historic high. However, it is up 35 basis points from the first quarter value two years ago, in 2020, and is back in line with pre-pandemic levels.
While core interest spreads have been crunched by rate cuts, a main factor in the earnings swings has been provision expenses. In 2020, credit unions expected high delinquency during periods of quarantine-era unemployment, so they allocated money to cover these expected losses. These funds came out of earnings, reducing ROA for much of the year. However, thanks to government relief plans, this expected loan delinquency never came to be. With record-strong asset quality, credit unions found that they put too much money into their allocation accounts, and therefore were able to put less than the historical norm into their allowance accounts in 2021. In practice, the record earnings of 2021 were a "taking back" of extraneous provision expenses in 2020.
Operating expenses have risen throughout the pandemic, but not at the same rate as assets. This implies that credit unions are spending less to manage each dollar of assets under management than ever before. While financially efficient, credit unions must be sure that their resources are sufficiently able to support member needs. With strong capitalization and steadying earnings, the industry at large has some flexibility to invest in member service.