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When Will Loan Demand Pick Up?

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This is the question at the forefront of many people’s minds—particularly as loan balances continue to decline and deposit costs move closer to their floor.  It’s a great question but impossible to answer with certainty.  Since our crystal ball is as cloudy as the next, perhaps a better way to approach the question is to ask it a little differently:  What will it take for loan demand to pick up?

Think back to 2004 and 2005.  What was the economy like?  Where were interest rates, GDP and consumer sentiment?  What was the inflation rate, unemployment rate and personal saving rate?  Finally, what was driving loan growth and the economy during this period?

The housing market was a major driver during this time period.  Unemployment was low, personal saving was negligible (even negative), credit was free flowing and housing construction was rising, all while housing values were rapidly increasing.  Now, let’s consider the housing market today using the graphic below (2010: Housing Recuperates, Celia Chen, Sr. Director, Moody’s Analytics).

Source: Fiserv, FHFA, Moody’s Economy.com

While some areas are in the midst of regaining their value, many others are not and likely won’t be for a long time to come.  As a result, housing may not be the driver of loan growth it once was and could remain a drag on loan growth as consumers continue to deal with the aftermath of the housing bubble.  So we circle back to the question:  What will it take for loan demand to pick up?

This question is a great scenario test drive for management teams to answer together.  The small piece discussed here is just one of the many aspects to consider when discussing this question.  Furthermore, answers to this question will vary depending on your credit union’s community and structure.

However, the objective of this discussion is not just to answer the question.  Rather, it is to consider the implications of the answers with regard to your current strategic objectives and even your tactical, day-to-day decisions.  You may find your direction and outlook to be inadequate in light of the discussions you are having.  If so, now is the time to address those inadequacies and position your institution to be successful in the future.

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Big Questions For 2010

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2010 begins with an immense question attached to it:  Where will the economy go this year?  Confounding any sort of clear answer are the conflicting signs of continued recovery and renewed downturn that came with the close of 2009:

  • The housing market has seen home prices rise for the sixth straight month in October.  However, the recovery appears fragile as one-in-seven households are either in foreclosure or delinquent on payments, while almost one-in-four households are underwater (Real Estate Faces Tough Recovery Slog, WSJ, 1/4/2010)
  • Car sales surged at the end of the year to an annualized rate of 11 million, making December the second-best month of the year.  However, this was still far below the 16 million annualized rate seen as an indicator of a healthy auto industry (Late Surge in Car Sales Raises Hopes for 2010, WSJ, 1/4/2010)
  • The Dow Jones finished up 18.8%, however, unemployment remains around 10% and the Fed, concerned with the fragility of the recovery, continues to keep the Fed Funds rate at a record low of 0-25bps (Fed Will Hold Down Rates, Citing Tenuous Recovery, NY Times, 12/16/09)

It is fair to assume that 2010 will hold its fair share of surprises, opportunities and crises that will require tough decisions and quick, deliberate action on the part of credit unions.  One question credit unions are asking themselves right now is, Are we as prepared as we can be? Below is a brief list of questions to consider to help assess your preparedness for what promises to be an interesting year:

  • Have we thoroughly explored the impact of a further economic downturn on our business model and business plan?  A material recovery?
  • What is our short list (no more than five) of strategic initiatives that must be pursued regardless of the economy to better position the credit union for the long term?
  • Have we created and communicated detailed game plans and do we have a defined project control process to ensure that progress on these strategic initiatives will be accomplished in 2010?
  • Are our board and senior management aligned on the definition of success for 2010?
  • Given the level of uncertainty and the likelihood of “surprises,” have we blocked, in advance, regular time for key decision makers to discuss new issues and make decisions?

With answers to these questions, your credit union will be in a better position to make decisions and react to unforeseen events.  This is especially important, as the point at which you address a problem is directly related to the number of viable options you have for solving it…