Economic Update
- It has been a noisy year for financial markets and the economy, but performance across several metrics has proven resilient
- There is little consensus on the future path of the economy among Fed leaders and Wall Street economists
- Credit union and bank profitability remained solid in 2025 amid widening interest margins and stable credit performance
A word we have used often to characterize financial markets and the economy in 2025 has been “noisy.” A simple, yet technical definition of noisy is “accompanied by or introducing random fluctuations that obscure the real signal or data.” In this context, the real signal or data could be economic growth, the unemployment rate, performance in equity and fixed income markets, or the financial performance of banks and credit unions. The obscurities could be tariffs, threats to Fed independence, geopolitical tensions, and the longest government shutdown in US history. To be clear, each of these could prove to have true economic costs rather than being merely distractions. However, thus far, the bark has been greater than the bite.
While ample sources of economic uncertainty and worry persist, the same could be said for economic opportunity. As such, there is a wide dispersion of potential outcomes forecasted by Wall Street economists and Fed leaders alike. The latter has been a heightened area of focus for financial markets in recent months as they try to assess whether the FOMC may be pivoting to a less dovish, or more hawkish, policy path. The minutes of the October 29 FOMC meeting and recent speeches by various Fed leaders suggest a growing contingent more worried about lingering inflation risk. However, as of Monday, the fed funds futures market showed a 100% probability of a December cut and nearly 100 basis points (bps) of rate cuts over the next year. If the labor market proves to be on firmer footing than what the FOMC doves seem to believe, this scenario presents upside risks to bond market yields. However, if business investment remains subdued and unemployment rises, the Fed is more likely to continue lowering the policy rate, as is currently priced by fixed income markets. As always, interest rate directionality scenarios are relative to what is already accounted for in current yields across the curve.
Industry Update
As teased above, credit unions and community banks have done quite well amid the noise. As illustrated in Exhibit 1, net interest margins (NIM) have expanded over the last year as principal paydowns on legacy assets have been redeployed into higher yielding loans and investments. At the same time, the average cost of funds has declined for both segments. For credit unions, the weighted average NIM approached 4% at the end of Q3, the highest in more than two decades. Credit union ROA rose 8 bps Q/Q to 0.91%, while ROA for commercial banks with $1-50 billion total assets held nearly steady at 1.23%.
Exhibit 1
On the credit front, both delinquencies and net charge-off rates have stabilized and generally trended sideways over the last year for banks and credit unions alike. One key differentiator between credit union and bank profitability falls “below the line” in terms of noninterest expense (NIE). The average credit union NIE ratio rose by another 3 bps in Q3 to 3.13%, nearly 50 bps higher than the commercial bank cohort. To be fair, the business models and associated expenses are very different for these two types of institutions. Nevertheless, rising NIE has been a modest negative in an otherwise strong year for the industry.
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