Loans at Last: 10 Industries to Benefit From Credit Union Lending

By IBISWorld Analyst Eben Jose

Nearly five years after the housing bubble burst and the financial system collapsed, politicians are still clamoring for new ways to free up capital and spark growth across the United States. The most recent effort, put forth by Senator Mark Udall (D-Colo.), proposes to increase the lending limit of credit unions from the current level of 12.25% of assets to 27.5%. Structured as nonprofits, credit unions were originally created to make personal, auto and micro-business loans to their members, typically not exceeding $50,000. Credit unions historically serve a different market and purpose than larger banks and are far smaller in scope: The assets of an average credit union hover around $93 million, whereas the average commercial bank commands $1.5 billion in assets. Now credit unions are seeking to play a larger role in lending to help small businesses and the economy as a whole. In light of what might become a credit union renaissance, IBISWorld has identified the top 10 industries that would most benefit from increased credit union lending capabilities.

-Internet Publishing and Broadcasting

-Wind Power

-Wound Care Manufacturing

-Generic Pharmaceutical Manufacturing

-Hybrid and Electric Vehicle Manufacturing

-Wireless Telecommunications Carriers

-Internet Service Providers

-Light-Emitting Diode (LED) Manufacturing

-Satellite TV Providers

-Wind Turbine Manufacturing

IBISWorld uses multiple factors – such as industry drivers and revenue projections – to estimate risk, which reflects the level of difficulty a company encounters within its industry. Risk assessments also incorporate an industry’s life cycle. Client industries in the decline stage of their life cycles are risky, while those in the growth stage of their life cycle pose less of a risk. Industries with the highest level of capital intensity and fastest rate of technological change that are currently in a growth phase are generally in need of quick, frequent access to credit. In particular, high levels of capital intensity mean these industries need to furnish equipment upgrades and make big-ticket purchases, and rapid technological change makes them more likely to borrow funds to finance technology upgrades to stay up-to-date and competitive. Whether they demonstrate high or low levels of risk, each of the following industries would welcome looser restrictions on credit union lending.

Low-risk industries

With increased funding for Medicare and Medicaid expected in 2012 and an aging population, it is not surprising that two of the four industries identified as posing low risk to credit unions are in the healthcare sector. Both the Generic Pharmaceutical Manufacturing (IBISWorld report 32541b) and the Wound Care Manufacturing industry (OD4099) are expected to grow significantly over the next five years at annualized rates of 6.3% and 7.3%, respectively. Unlike other high-growth industries, these two pose little risk to credit unions because demand for healthcare is set to increase over the period due to the growing median population age and increased government funding. The demand for wound care products has also been driven by a rise in chronic conditions, such as diabetes and obesity that often necessitate the regular use of these products. On the other hand, demand for generic pharmaceutical products is set to rise as brand-name manufacturers lose drug patents over the next five years, presenting generic pharmaceutical companies with the significant opportunity of manufacturing several more popular drugs.

Outside of healthcare, IBISWorld has identified the LED Manufacturing industry (OD4456) and the Internet Publishing and Broadcasting industry (51913b) as presenting high growth with limited exposure to risk for credit unions. Growing demand for environmentally friendly products will drive light-emitting diode (LED) manufacturing in the five years to 2017. Downstream industries and consumers both have accepted the use of LEDs in place of traditional bulbs, which makes their dominance of mainstream consumer products inevitable. As a result, the industry is expected to grow at an annualized rate of 3.4% over the next five years. Similarly, demand has increased for internet publishing and broadcasting, especially with the rapid development of mobile technology. IBISWorld expects the explosive growth of mobile internet functions to lead industry revenue to skyrocket at an annualized rate of 16.2% over the next five years, making it the industry with the lowest risk to credit unions.

Medium-risk industries

IBISWorld has identified the Wireless Telecommunications Carriers industry (IBISWorld report 51332), the Satellite Television Providers industry (51711b) and the Internet Service Providers industry (51711d) as having a medium level of risk to credit unions. Although these industries are expected to display healthy growth over the next five years, they also will face more significant impediments to that growth. For example, satellite television providers face substantial internal and external competition because their products can be easily replaced with less expensive or more entertaining substitutes (e.g. Hulu and Netflix). Furthermore, several substitutes, including products such as Skype, are posing a significant threat to wireless telecommunications carriers. In the five years to 2017, these three industries are each expected to average about 3.9% annual growth in revenue.

High-risk industries

IBISWorld has identified the Wind Power industry (IBISWorld industry report 22111d), the Wind Turbine Manufacturing industry (33361b) and the Hybrid and Electric Vehicle Manufacturing industry (IBISWorld industry report OD4516) as presenting high levels of risk for credit unions. All three industries are currently in the growth phase of their life cycles with respective annual growth rates of 8.4%, 2.5% and 6.3% forecasted for the five years to 2017. However, each of these industries is highly susceptible to swift changes in federal funding and regulation. For example, both the Wind Power industry and the Hybrid and Electric Vehicle Manufacturing industry rely heavily on tax credits that make technological development more feasible and distribution more affordable for consumers. In fact, consumers received sizable tax credits for purchasing hybrid and electric vehicles over the past five years, but these incentives are not expected to continue, which puts more pressure on industry firms to balance production costs with retail prices. Additionally, these three industries face a high level of consumer substitution. For example, many consumers choose to not purchase electric vehicles because there is not widespread access to charging terminals in comparison to gasoline stations. Overall, the technology these industries are developing is young relative to the other seven industries in this report, which makes them a far riskier opportunity for credit unions.

Regulatory concerns and opportunities

While the financial collapse negatively affected credit unions, it hit community banks and commercial banks especially hard. Commercial banks were forced to decrease their lending operations and tighten the requirements for receiving loans in an effort to consolidate their operations and decrease their overall exposure to risk. Similarly, community banks were forced to deal with these issues in addition to a substantial decrease in customer deposits, which together made it difficult for many to remain in business. Although raising the credit union lending limit may provide an influx of capital, some are worried it will necessitate higher taxes on other institutions and make the economy less stable than it currently is. As a result, legislators have proposed several safeguards.

If the legislation were to pass, credit unions would have to comply with several federal regulations before beginning to lend above the current level. Such regulations require credit unions to have at least five years of experience making member business loans, loan officers with at least two years of commercial lending experience and a member business loan portfolio that totals at least 80.0% of the 12.25% lending cap for at least four quarters preceding the credit union’s request to increase its lending limit. However, commercial and community banks have argued that the legislation’s effects would disrupt the economic recovery. First, raising the lending limit would shift loans away from community banks that pay taxes to credit unions that, as smaller organizations, are not required to pay some taxes. As a result, federal and state governments would be forced to increase taxes on businesses and individuals to account for the estimated $500.0 million impairment. Secondly, despite several safeguards, an increase in commercial lending could potentially lead to reckless lending and the closure of many credit unions because many do not have experience making large loans.

Nevertheless, with nearly 500 out of a total 7,200 credit unions nearing the current limit of 12.25%, Senator Udall’s legislation would certainly provide the industry with an opportunity to shift its focus to small business lending and increase its market share at the expense of commercial and community banks. Commercial banks would retain most of their high-value lending business but would likely lose many medium-sized borrowers. Although community banks would suffer, their deep regional roots would help them retain more of their business than commercial banks. As result, IBISWorld estimates an increase in the forecast for the Credit Unions industry from about 3.1% average annual growth to roughly 5.0% average annual growth over the five years to 2017. If the lending capabilities of credit unions expand, many other industries that have struggled to secure loans from traditional banks could finally secure funding to aid their own growth.

To download full research reports for the industries discussed in this article, click on the report titles below.

Internet Publishing and Broadcasting, Wind Power, Wound Care Manufacturing, Generic Pharmaceutical Manufacturing, Hybrid and Electric Vehicle Manufacturing, Wireless Telecommunications Carriers, Internet Service Providers, Light-Emitting Diode (LED) Manufacturing, Satellite TV Providers, Wind Turbine Manufacturing, Credit Unions

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