Do Lower PLL Ratios Mean The Credit Crisis Is Over?
On the surface, recent credit union provision for loan loss (PLL) trends seem encouraging; industry-wide through second quarter 2010, the ratio of PLL to average assets has declined by 31 basis points to an annualized ratio of 0.81%. However, delinquencies and charge-offs as a percent of loans have only decreased by 11 basis points and 5 basis points respectively for the same period.
Of course every situation and institution is unique, but as we look toward 2011, credit unions might want to consider:
- Is the improvement in PLL sustainable? Or, could it be a function of allowance accounts being over-funded? As noted above, recent delinquency and charge-off trends do not look as positive as the industry PLL trend
- Do the unemployment outlook, real estate values and the trends in member credit scores support the assumption that PLL will continue to decrease through 2011?
- What if many of our usually dependable borrowers lose their jobs and, at a certain point, run out of savings?
- What if strategic defaults become more commonplace? Consider that strategic defaults are currently blamed for as much as 25% of foreclosure activity
- Could commercial real estate woes trickle down to further impact the economy and cause broader loan losses?
Is 2011 the year that we’ll see sustainable improvements in PLL? Hopefully it is, but with all of the uncertainty out there, we may not want to count on it just yet.
