By: Michael Gulledge, Principal, Advisors Plus and Barney Moore, Principal, Advisors Plus
Credit unions are performing masterfully in supporting their members through the COVID-19 crisis. Many are providing members with much-needed relief in various forms, including payment deferral programs, fee waivers, additional credit access on favorable terms, and workout arrangements and hardship programs. They are using this time to build stronger member relationships and retrain or redeploy their employees to support new ways of doing business. Empathy and adaptability characterize their response to these extremely challenging circumstances.
Adapting to Challenging Times
We cannot ignore the unprecedented job losses experienced amid the COVID-19 outbreak. Over 35 million jobless claims have been filed, and the unemployment percentage rate currently stands in the mid-teens. Many of these jobs will be slow to come back or not come back at all. Unfortunately, there is no way around the fact that a wave of credit losses is building. No amount of accommodation or forbearance can avoid that reality, and it is not sustainable.
Anecdotally and through earnings releases, we are hearing that large bank credit card issuers are beginning to tighten credit. They are reigning in account acquisition efforts and reportedly reducing credit lines for some borrowers, while adding to their loss reserves in anticipation of higher charge-offs.
As difficult as it may sound, credit unions must begin to take some of those same actions. We are in a turbulent environment and will be for some time. Individual credit union situations will differ. Some membership bases will be relatively insulated from COVID-19 financial hardships, while others will feel acute impact. Understanding your membership will help guide the steps required to navigate through the remainder of this year and into the next.
Steps to Take Now
Here are some suggestions for what you can do now to help your credit union manage through this difficult period:
- Evaluate your membership and attempt to measure the level of distress they will be experiencing.
- Translate that insight into quantifiable estimates of increases in delinquency and credit loss experience over the next 18-24 months.
- Begin increasing loss reserves incrementally. Increase the provision for loan losses to spread the impact of inevitably higher loss rates (income statement management, maintain sufficient balance sheet reserves).
- Consider the use of (or evaluate your current) adaptive control strategies (ACS) and resultant treatments for collections and credit line management.
- Remember that ACS generates a FICO-developed behavior score every month following the cycle date. The behavior score may be a good indicator of risk since it is current, based on account performance with the credit union and predicts the likelihood that an account will go 90 days delinquent in the next six months.
- Review your pricing and credit line assignment for new accounts – some tightening may be in order. Consider employing more manual scrutiny (as outlined in this previous blog).
- Employ relationship data and analytics to segment accounts for identification and treatment purposes:
- Changes in direct deposit activity that could indicate a loss of employment or income
- Higher balances, increased utilization of available lines
- Slower payments (outside of payment deferral options)
- Lower payments – accounts only making the minimum or less than the minimum payment
- Begin to lay out your anticipated staffing needs and reinvigorated collections approach, as well as the training, tools and methods you will employ to manage through a period of elevated delinquency and losses.
Managing Through the Next Phase
As we begin to emerge from the first wave of this global crisis, it will be imperative for credit unions to turn their attention to planning for business viability in the long term. Providing the types of member relief mentioned above is appropriate and prudent, given the conditions we are facing. Thankfully, coming from a position of strength as an industry, we have been able to do what sets us apart through our mission of “people helping people.”
Michael Gulledge is a Principal Consultant with the Credit Card practice at PSCU’s Advisors Plus. Mike uses his 25-year track record as a senior executive in the credit card industry to perform in-depth credit card P & L reviews for credit unions. His analyses focus on presenting both strategic recommendations for improving a credit card portfolio’s financial performance and on creating a blueprint for its ongoing management.
Barney Moore is a Principal Consultant with the Credit Card practice at PSCU’s Advisors Plus. Barney advises credit unions on ways to enhance portfolio growth and profitability through P & L and key metric performance analyses, competitive product assessments, and industry and peer benchmarking reviews.