Commercial Lending in a Recession: What Credit Unions Should Know

Credit unions reached a milestone in 2022 as commercial loan portfolios passed the $100 billion mark early in the year and continued growing at a solid pace. In only six months, credit union business loan portfolios grew 12.7%, or $12.4 billion. Business lending portfolio balances increased a healthy $15.5 billion, or nearly 19%, in a year. Business loans now comprise 5.12% of total credit union assets nationally.

However, for credit unions that have recently moved into member business and commercial lending, 2023 may present the first time they’re doing so ahead of and during a recession, which most economists expect to occur before the end of the year.

Here’s what credit union leaders should consider as they continue to provide credit to businesses in their local communities.

Make Informed Pricing Decisions

Insight into commercial relationships will enable credit unions to accurately price products and deals to reflect the appropriate risk and opportunity with each business member. The businesses with a steady, reliable cash flow will typically be a better credit risk than a younger company with less of a financial track record. However, the risks with each of those two types of member businesses can shift rapidly as their suppliers increase prices, their members’ demand for their products and services changes and a host of other economic changes, not to mention the impact of any new legislation (i.e., new safety requirements).

Being able to adjust quickly as interest rates and other economic factors change, apply proper credit for deposit balances and service fees will enable you to more appropriately price your products and services to reflect current market conditions.

When relationships are priced correctly, credit unions can offer lower rates and continue to invest in better products, improving the banking experience and further supporting members during a recession.

Proactively Manage Portfolio Risk

Credit unions should also have a solid understanding of where potential problems may arise before they negatively impact portfolio performance. Some credit unions may see risk exposure in a certain area (i.e., loans to businesses in a particular industry). That’s why you want to be looking as much as possible at leading indicators, not lagging indicators. Look at behavior changes among business and commercial borrowers. For example, if a local manufacturer is shutting down, it may negatively affect nearby service businesses.

Credit unions also should avoid narrowly focusing on lagging indicators, such as missed payments. Lagging metrics indicate a problem, oftentimes after it’s too late and other options have been exhausted. Instead, look for leading indicators of financial challenges, such as decreases in depository accounts or an uptick in overdrafts. With an effective portfolio monitoring solution that incorporates these considerations, credit unions can act quickly, rather than wait to react until a loan is in severe default.

In today’s rising rate environment, proactive portfolio management empowers credit unions — no matter how lean their team may be — to remedy challenges early on and better support the business members they serve, despite a cooling economy.

A 2023 recession is all but a given, according to most economists. The only questions are when it will occur, how severe it will be and how long it will last. Credit unions that make informed pricing decisions and proactively manage portfolio risk will be well-positioned to provide their member businesses with economic stability in what could be a challenging year.

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