Balance Sheet Control
PLANO, Texas -
"A lot of credit unions don't think they have a lot of control over the balance sheet,'" said Brian Turner, director of advisory service for Southwest Corporate Investment Services. "They don't know they have the ability to control that themselves."
And that control, several economic experts told the Credit Union Journal, is going to be key in 2007.
"I think we're going to see short rates down to 4% to 4.25% by the end of this year," said Dwight Johnston, vp-economic and market research at WesCorp, San Dimas, Calif. "It all goes back to the housing situation."
Johnston described a ripple effect as the housing market continues to slow, with job losses in industries related to housing, such as construction, in turn spurring the Federal Reserve to cut short-term rates.
Johnston's advice: it's time to repair some ladders.
"We have always been advocates of maintaining a structured ladder portfolio. We don't want to see credit unions sitting on a lot of cash. We want to encourage them to push on out there, be a little more aggressive and repair some of those broken ladders that they let go by the wayside over the last few years."
Auto lending is going to be another major challenge, Turner suggested. "Auto lending comes down to two things: member demand for new cars and their ability to buy them, and second, auto manufacturers' incentives," he said. "If they offer price incentives, then credit unions can play, but it's tougher if the incentives on offer are finance incentives."
Turner said he is seeing a combination of both types of incentives. His advice: rethink the standard. "Some credit unions set their standards a little too high and just go after 'A' credit. Consider working with your strong 'Bs,'" he suggested. "And make sure you are defining your 'As' properly. If you define 'A' paper as a credit score of 740 or above, well, no wonder you're not making any loans."
One potential boon in the short term, according to Members United Corporate FCU Chief Investment Officer Ronald Koza, is the gift card phenomenon. "People haven't been sure what to make of retailers' holiday numbers, and they're still coming out, but one of the things we're going to see is an added lift from all the sales of gift cards," he offered. "That helps drive holiday-related spending into the first quarter of 2007, when normally holiday spending is long since over."
In addition to the fact that people frequently spend more money than is allotted on the gift card, this also helps move inventory off of retailers' shelves, in turn sparking more production.
Koza's advice for 2007: don't give up on lending just because it's going to get harder to do given slowing demand. "Lending is still the greatest way for credit unions to make their margins," Koza observed. "They will want to look to create some value in investments, but the focus must stay on making loans and taking in deposits, because that is what credit unions are good at. They may want to do some exploration into other areas, such as member business lending, which many credit unions have the ability to develop the expertise to do safely, and alternative mortgage products."