Return on assets (ROA) is a powerful metric that helps credit union leaders determine how efficiently their institution is generating income from its available assets — in other words, what the credit union is doing with what it has. Executives that compare their ROA against the ROA of other credit unions, however, should keep in mind that institutions surrendering potential profit in the service of members — through lower fees and rates, for example — will report a lower ROA than peers whose strategy tilts the other way in the profit-member balance.
Regardless of strategy differences, 2020 has proven to be a year like no other for credit unions across the United States. From the third quarter of 2019 to the third quarter of 2020, rate cuts at the Fed, balance sheet growth that far surpassed income growth, a jump in provision expenses in preparation of diminished future asset quality, and more have put pressure on ROA. The end result: Credit unions nationally reported an annual decline of 32 basis points in ROA. During the same period, net worth ratios at U.S. credit unions fell 95 basis points. Like the downward pressure on ROA, asset growth — not capital erosion — was the primary contributor to the decline.
EARNINGS MODEL COMPARISONS
FOR U.S. CREDIT UNIONS | DATA FOR 09.30.19-09.30.20
© Callahan & Associates | www.creditunions.com
Despite annual deterioration of earnings model metrics through the third quarter, a quarterly view shows credit unions’ earnings are beginning to rebound.
The picture might appear bleak at first blush; however, when economic conditions are rapidly evolving — such as during a recession or global pandemic — comparing changes in earnings and capital on a quarterly basis can yield deeper insight.
At the onset of the COVID-19 pandemic in the United States, credit unions adopted a cautious approach to risk management following state and local restrictions, economic relief packages, and changes to Federal monetary policy in March and April. Provision expenses rose substantially in the final weeks of the first quarter — increasing 25.3% from one quarter earlier and 33.6% from one year earlier — and ultimately pushed down ROA 41 basis points lower than at year’s end.
Industry challenges became even more pronounced in the second quarter. Credit unions braced for the possibility of widespread credit deterioration, causing provision accounts to rise more than 50% annually. At the same time, lagging consumer loan demand and rapidly declining investment yields following the Fed’s rate cuts in March slowed revenue growth.
Throughout the second quarter, credit union members — and consumers nationwide — aggressively saved excess income and stimulus funds. The result was record deposit balances and ballooning cash positions in investment portfolios as credit union lending departments struggled to keep pace with share inflows despite strong mortgage demand. Consequently, surging asset growth caused many earnings model and balance sheet ratios to deteriorate.
However, with the arrival of summer and lightened restrictions in different regions across the country, several subtle shifts began to emerge in the second and third quarters. Notably, non-interest income, which was initially negatively impacted as members pulled back on spending, rebounded. Contributing to the improvement was an uptick in member spending, the expiration of fee waivers and relief programs, and healthy margins from gains on secondary market mortgage sales.
The bottom line: Although ROA dropped 32 basis points annually in the third quarter of 2020, the national average increased 5 basis points from March to June and an additional 9 basis points from June to September.
Don’t stop now! Dig deeper into the data with “A Regional View Of Earnings And Capital In The Third Quarter Of 2020”
Get Your Custom Earning Model Comparison
Request a custom Earning Model Scorecard that compares your credit union to industry peers on key ratios like interest income, non-interest income, operating expenses, ROA, and more.