Year-End Bankruptcy Impact – Too Much Hype?

Financial services headlines are talking about the impact of the changing bankruptcy law on the bottom line. During 2005, loan balances subject to bankruptcy in credit unions rose by 17 percent. But is this really what caused a decline in ROA?

 
 

Return on assets for all credit unions fell to 0.86 percent in 2005, a seven basis point decline from 2004. The year-end buzz around the financial services industry is all about bankruptcy law changes, net charge-offs and how they affected the bottom line. Credit unions saw evidence of this with loans subject to bankruptcy at year-end increasing 17 percent over December 2004 balances. But is this really the reason for a lower ROA?

The big picture says no. Despite the increase in balances, bankrupt loans as a percent of total loans rose only slightly in 2005. Furthermore, net charge-offs as a percent of total loans remained essentially unchanged in 2005 as compared with 2004, as shown in the chart below.

 

2004

2005

Change

Loans Subject to Bankruptcies

$2,278M

$2,675M

17.4%

Net Charge-Offs/Total Loans

0.53%

0.54%

0.01%

Bankrupt Loans/Total Loans

0.54%

0.57%

0.03%

Looking further into the seven basis point decrease in return on assets, it is evident that dividends paid out were the most significant factor when calculating the change in ROA. Dividend payouts to members as a percentage of assets increased by 28 basis points in 2005, even more than the increase posted in interest income. By comparison, the provision for loan loss rose only four basis points.

All as a % of Assets

 

 

 

 

2004

2005

Change (BPS)

Interest Income

4.74%

4.99%

25

Non-Interest Income

1.13%

1.22%

9

Dividends

(1.35%)

(1.63%)

-28

Provision for Loan Loss

(0.35%)

(0.39%)

-4

Operating Expense

(3.21%)

(3.25%)

-4

Borrowing Expense

(0.07%)

(0.10%)

-3

Non-Operating Gain/Loss

0.04%

0.02%

-2

Net Income (ROA)

0.93%

0.86%

-7

The components of ROA show that the flat yield curve had a greater impact on the bottom line than new bankruptcy laws. Credit unions have become more competitive in the marketplace, raising their rates and paying out more in dividends to their members.


For complete information about year-end industry trends, pre-order the 2006 Credit Union Financial Yearbook.
 

 

 

March 6, 2006


Comments

 
 
 
  • How does this analysis look based on CUs with lending specialties? Is it more (or less) severe with big time players in credit cards vs. auto lenders? How about those that dabble in the sub-prime space?
    Anonymous