Economic Impact of COVID-19 on Credit Unions

Market FeasiBIlity Study

Increase in liquid assets and decline in savings

In any economic crisis, people need to tap into their savings causing a dip in long term savings and increase in liquid assets. We saw this clearly during COVID 19. We see a sharp rise in the share of cash in overall asset size across credit unions of all sizes in 2020 second quarter(fig-1). The figure shows the time trend of median cash to asset size ratio for credit unions of different sizes.

Figure 1 -Total Cash to Total Assets Time Trend

Big portion of this rise in liquid assets is due to the cash stimulus provided by the federal financial aid. We see a sharp jump in median asset size across all credit unions (fig-2) in 2020 second quarter.

Figure 2 – Quarterly Growth in Assets

While liquid assets went up, we also see evidence of the median share of long-term saving in overall deposits going down (fig 3) for the first time in 2 years in most cases.

Figure 3 – Total Share Certificates to Total Deposits Time Trend

Decline in Net Worth

Median net-worth of credit unions declined sharply in 2020 second quarter, since the onset of the pandemic (fig 4).

Figure 4 – Total Net Worth to Total Assets Time Trend

It is partly driven by sharp decline in income for the first time in 2 years. Figure 5 depicts this decline as a dip in the median of the ratio of income to assets. While part of that decline is also a result of the fact that asset sizes increased sharply in 2020 Q2 as a result of the stimulus but we certainly see a negative income growth starting 2020 Q1 as depicted in figure 6.

Figure 5 – Gross Income to Average Assets Time Trend
Figure 6 – Annualized Income Growth Over Time

Most of the decline in income comes from slight drop in interest income and sharp decline in fee income starting 2020 Q2 as depicted in figure 7 and 8 respectively.

While interest income from loans dip starting 2020 Q2, mortgages saw an uptick indicating an upbeat housing market during the pandemic (fig 9). This seems to be more evident in the case of credit unions which service more of 2nd and 3rd tier cities and towns and less of big metropolitans. This is reflective of the movement from bigger metropolis to smaller cities due to the wide adoption of remote work during the pandemic.

Figure 9 – Real Estate First Lien Loan to Total Loan Time Trend

While real estate first lien mortgage lending looks healthy, we see a dip in junior lien mortgage lending (fig 10), new vehicles lending (fig 11) and unsecured credit card lending (fig 12). This is reflective of lesser demand for credit in areas outside of the housing market and is reflective of the economic impact of the pandemic.

Figure 10 – Real Estate Junior Lien to Total Loans Time Trend
Figure 11 – New Vehicle Loans to Total Loans Time Trend
Figure 12 – Total Unsecured Credit Card Loans to Total Loans

Cutting Expenses

We see a conscious effort to cut down expense across the board (fig 13).

Figure 13 – Annualized Total Expense to Total Assets Time Trend

Bigger Credit Unions have more leeway to cut other operational expenses as compared to the smaller ones and this is reflected in figure 14.

Figure 14 – Total Other Operational Expense to Total Expense Time Trend

While there was a dip in operational expense, ratio of employee compensation to total expense went up (fig 15), particularly for larger credit unions. This is indicative of the perception that credit unions look at pandemic having a short-term economic event and there is a good chance of quick recovery. It therefore made sense to retain the employees and cut other operational expense.

Figure – 15 Total Employee Compensation to Total Expense Time Trend

Industry Consolidation

We do see some evidence of a slight increase in ongoing trend of industry wide consolidation due to the pandemic. While there is a significant drop in the number of credit unions between 20 and 50 million asset size, we see a noticeable increase in the number of bigger credit unions (fig 16).

Figure 16 – Active Credit Union Counts Time Trend