Credit Unions Face Challenges

Dealers have turned to credit unions to finance their customers more than ever since the economic slowdown started three years ago.
But how financially secure are credit unions compared to banks?

About a third of the nation's 7,391 credit unions are considered weak by Weiss Ratings. The rating agency ranks only 10 percent of credit unions as strong.

That sounds like a potential problem, but what it really means is most are average, said Gene Kirsch, bank analyst for Weiss.

Size plays a major part in the ratings. Most credit unions are small, often with only one branch.

"Typically, those tend to be the weaker ones, because they can't withstand any significant loan loses," Kirsch said.

Even the largest credit union, Navy Federal Credit Union, is smaller than the 20 largest banks.

Credit unions still have a lot going for them.

Overall, the nation's credit unions increased profits by $658 million to $1.7 billion despite a $6.1 billion decline in lending in the first quarter, compared to the same period last year. Deposits grew, year-over-year, by almost 5 percent to $822.7 billion.

Those are the most recent numbers available.

Industry liquidity - short-term assets as a percentage of short-term liabilities - increased from 10.4 percent at March 31, 2010 to 22.2 percent at March 31, 2011, an indication that the industry may be better equipped to weather economic downturns.

And if a third of credit unions ranking as weak seems high, that's still lower than the number of weak banks.

This proves good news for car dealers because credit unions focus on the auto finance business.

"Their bread and butter is car loans," Kirsch said.

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