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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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Chinese Rating Agency Downgrades U.S. Credit Rating

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Chinese rating agency Dagong Global Credit Rating Co., known in China for rating companies, recently issued credit ratings for 50 countries for the first time. (Dagong’s Report)

Below is an excerpt of the top 20 nations rated:

Perhaps the most notable was the downgraded AA rating given to the U.S.—two levels below the top grade.  While Dagong’s downgrade of U.S. creditworthiness hasn’t created the financial turmoil that Moody’s or S&P’s could, it has raised some interesting questions:

  • Why would Dagong downgrade a significant portion of investments owned by China?
  • What will China do with its current Treasury holdings given the downgrade?
  • How will the downgrade affect China’s Treasury purchases and holdings in the future?
  • Inasmuch as the downgrade has had nominal, if any, impact on U.S. financial markets thus far, will it have any influence at all on Western rating agencies?

As the largest foreign holder of U.S. Treasurys (around $868 billion as of May 2010 according to the U.S. Department of the Treasury), China’s response to these questions will have a significant impact on the U.S. economy.  Whether purchasing, selling or holding Treasurys, China influences the trajectory of interest rates here—which changes the economic conditions that businesses, including credit unions, must operate in.

So while Dagong and China may not be a daily consideration for credit unions, following developments in the U.S. Treasury market will be an important factor to business planning and exploring where interest rates will go.