Q4 2020 HealthScore Update
The current credit union industry HealthScore, updated to include 4th quarter 2020 credit union performance data, is 6.081. The latest score represents a 3.3% year-over-year improvement. Driving improvements are the continued stimulus-driven increases in the asset growth scores, and increases in scores related to credit quality. Despite the overall score improvement, substantial concerns remain as a result of lingering COVID-inspired economic issues that continue to pressure earnings, net worth, and loan growth-related component scores.
There are a number of component scores that experienced a positive year-over-year change that ultimately resulted in improvements to the aggregate HealthScore. These components, and their year-over-year improvement percentages, are referenced in the table below. Note that if you are on a mobile device we suggest you click on the table to access the full set of data.
The "Potentially" Bad
Component scores that experienced a negative year-over-year change, while offset by the positive influences noted above, are disconcerting due the scale of their declines. These components, and their year-over-year decline percentages, are as follows:
The scores for Net Worth, Solvency, and the Texas ratio show credit unions as a whole remain strong and well-capitalized even with the unprecedented influx of stimulus deposits. In the event the economy “roars back” and interest rates rise, as some assume will occur over the next year, the average credit union will be well-positioned for success. However, if full recovery drags on then it is certainly likely that credit union HealthScores will start declining.
One of the main challenges credit unions face, in aggregate, is with operating expenses. While operating expense scores have improved, that particular score is in relation to asset growth, which we noted above is unprecedented. It is when looking at expenses in relationship to income, reflected by the Efficiency score, that we see the potential issue. Q4 represents the fifth straight quarter of efficiency score declines, with declines in this case driven by reduced income relative to expenses (rather than expenses rising in relation to stable income). In other words, expenses are high relative to income, and it will be hard to trim expenses to right-size them in relation to lower rates of income without cutting staff.
Hopefully rates and economic recovery will save the day, but if not, and credit unions maintain compensation and benefits costs as-is, capital deterioration will accelerate. The Net Worth score, which as noted sits at 8.35, is the lowest it has been since 2012 (note that we mean score, not net worth ratio). Sustained expense levels and declining income resulting from loan and membership growth issues will not be good for credit union Net Worth scores. Definitely an unfortunate position to be in to start the year, and that is not even factoring in the next round of stimulus soon to pass Congress.
That said, loan growth scores could be looking at a rebound. Year-over-year Q4 2020 score changes are in relation to Q4 2019, which were much better than 2020 numbers. However, since the low point of Q1 2020 we’ve seen quarter after quarter score improvements. It is likely that Q1 2021 will look much better compared to an anemic Q1 2020, meaning a loan growth score increase is likely (see chart).
To be absolutely clear on that last point, however, the scores could improve even if loan growth isn’t substantially improved over Q4, but we do think solid Q1 performance is likely - at least for aggressive credit unions.
Performance by Asset Peer Group
The table below illustrates asset peer-level HealthScore performance. A score of 5 or above is generally considered to be of “average” health, meaning that the credit union group is generally sound. In the case of asset peer groups, all are above the score threshold of 5, but clearly there are notable performance differences between smaller and larger asset peer groups, and also in minimum score comparisons.
Performance by State
The table below illustrates state-level HealthScore performance. Oregon and Washington both maintained their positions at the top of the state HealthScore rankings.