Navy Federal’s loan growth far outpaces bank competitors | Credit Union Journal

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Navy Federal Credit Union is generating industry-leading growth. But it’s also taking on more lending risk at a time when higher interest rates have bankers nervous.  

For the $168 billion-asset Navy Federal, the largest credit union in the world, third-quarter loans totaled nearly $122 billion, a 5% increase from the second quarter. That more than doubled the credit union industry standard and far surpassed banks’ collective growth.

Its gains were fueled by strong consumer lending advances, including credit card balances and single-family first mortgages, according to data released this week.

Total loans outstanding for U.S. credit unions reached $1.56 trillion for the third quarter, up 2%, according to call report data from the National Credit Union Administration.

Median sequential loan growth among the 15 biggest banks was just 0.1% for the third quarter, according to S&P Global Market Intelligence data. Federal Reserve data showed essentially flat lending across large regional banks last quarter as well.

Among community banks, or those with less than $10 billion of total assets, the S&P data showed sequential third-quarter loan growth of 1.9%. While better than bigger banks, that marked a decrease from 2.5% growth during the second quarter.

“Loan growth should remain slow for the rest of 2023 and into 2024, as banks exercise caution and demand slows,” analysts at Jefferies said in a report. They noted that high interest rates sent borrowing costs soaring and galvanized recession fears. When that happens, borrowers move to the sidelines and banks, concerned about customers’ ability to repay loans, tend to pull back as well.

Navy Federal, however, forged ahead, supported by a global military customer base that’s relatively recession resistant. Armed forces staffing levels and budgets are more dependent on long-term U.S. defense needs than on near-term economic cycles.

The Vienna, Virginia-based Navy Federal serves all branches of the military, including the Navy, Army, Marine Corps, Air Force, Coast Guard and Space Force. It has 13 million members and more than 350 branches.

Still, Navy Federal’s growth came with some pains. Its total loan charge-offs for the third quarter were $1.8 billion. That’s up 50% from the second quarter and an increase of roughly 63% from the same period a year earlier.

Navy Federal declined interview requests. But a spokesperson provided American Banker with a broad statement: “Our growth is simply a testament to the value we provide to our members. We’ve grown responsibly by staying true to ourselves, serving a field of membership that shares the common bond and values of military service. Our growth has taken place for the benefit of our members — we’re a larger, stronger organization that’s better able to meet members’ needs while providing competitive rates for all services and products.”

Credit unions broadly have reported increased levels of loan losses. For the credit union industry, there were $8.6 billion of charge-offs in the third quarter, up about 6% from the second quarter and more than double the $4.1 billion in the third quarter of 2022, according to the NCUA data.

For Navy Federal, the higher credit costs contributed to a decrease in net income.

Navy Federal earned a cumulative $1.2 billion in the first three quarters of 2023, a 9% decrease when compared with the same period a year earlier, according to the NCUA data. The regulator tracks earnings on a year-to-date basis.

Jeff Voss, managing partner for consultancy Artisan Advisors, said Navy Federal’s charge-offs have increased to 1.9% of total loans as of Sept. 30 — the highest level in more than four years. The credit union increased its allowance for credit losses to 3.68% of gross loans, significantly higher than the 1.9% level at the end of 2022.  

“Higher loan rates on variably priced loans, like credit cards,” are “contributing to increased delinquency,” Voss said.

However, the Federal Reserve has paused its interest rate hiking. It has not raised rates since July, and again this week decided against another increase. The central bank signaled multiple rate decreases may lie ahead in 2024.

“With inflation rates seemingly stabilizing and falling toward benchmark levels, the belief is the Fed will not continue to increase rates in the future,” Voss said.  

Should the Fed lower rates next year, it could lower credit card rates, which should result in improvements in delinquency ratios over time. “It is a cycle,” Voss said. “The question will be how long will it take the Fed to do its part.”