Dramatic Loan Losses Forecasted as COVID-19 Crisis Began
The National Credit Union Administration (NCUA) has released it’s year over year financial comparisons of Q1 2019 vs. Q1 2020. The report showed that some degradation in the health of the CU industry was already taking place in the months leading up to the COVID-19 crisis. While delinquency had risen, it had not yet “spiked” and cautionary precursors over the possibility of a major crisis attributed to large increases in allowance for loan losses that degraded the net incomes of the credit union industry by 40%.
The NCUA report illustrates that net income at federally insured credit unions (FICUs) fell by 40 percent at the end of the first quarter of 2020 compared to a year ago, according to the National Credit Union Administration. Net income was $2.1 billion as of March 31, 2020. In comparison, net income was $3.5 billion as of March 2019. Over the same period, delinquency only rose 6 basis points to 63. Q2 data, when released, will likely tell a dramatically different picture.
The decline in net income was due in part to an increase in provisions for loan and lease losses. Provisions for loan and lease losses were $2.13 billion at the end of the first quarter of 2020, up from $1.6 billion at the end of the first quarter of 2019.
The delinquency rate at federally insured credit unions was 63 basis points in the first quarter of 2020, up 6 basis points compared with the first quarter of 2019. Loan performance deteriorated somewhat in all major categories:
- For auto loans, the delinquency rate increased 5 basis point to 58 basis points in the first quarter of 2020.
- The delinquency rate on fixed-rate real estate loans was 35 basis points in the first quarter, up slightly from 31 basis points one year earlier.
- The credit card delinquency rate rose to 137 basis points from 126 basis points in the first quarter of 2019.
- The delinquency rate for commercial loans, excluding unfunded commitments, was 73 basis points in the first quarter of 2020, compared with 63 basis points in the first quarter of 2019.
- The net charge-off ratio for all federally insured credit unions was 58 basis points in the first quarter of 2020, compared with 57 basis points in the first quarter of 2019
With Q2 in the books, it will take a few months for the aggregated data to be reported and at least another month for CU by CU data to become available for public view. And while extensions and modifications have provided necessary relief to both the public and credit unions over this period, it is likely that we will see further erosion in credit union net incomes over this quarter as loan loss expectations climb.
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