AUSTIN, Texas-NCUA's corporate rescue may force credit unions to make some tough ALM choices this year. But one securities firm says that investing in longer-term instruments should not be one of those.
"It would have been a tough year anyway for credit unions, let alone NCUA dropping the 62 basis points in negative ROA on them," said Steve Coale, managing director at Amherst Securities Group here, who cautioned against overreacting to the net worth pressure. "It's absolutely the wrong time to go longer term in fixed-rate bonds and member fixed-rate mortgage real estate loans, and CUs will be tempted to go longer."
Coale predicted the money the Fed is injecting into the economy and the record-low Fed funds rate that can only rise will lead to inflation in the next 18 to 24 months.
"Rates will move up from current historic lows. That's short- and longer-term rates. If you are locking in a 30-year, fixed-rate member mortgage loan at 4.75%, today 4.75% looks good. But how good will that look three years from now?"
Suggested Alternatives
Coale had several alternatives to suggest.
"The bonds we are recommending are floating-rate agency CMOs, floating-rate agency ARMs, and truly AAA private-label floating-rate arms and CMOs, and shorter fixed-rate agency CMOs, with average lives of 2.5 years or less," Coale said. "The amortizing securities will pay cash back that will be available to fund future loan demand when the economy turns around."
No Way Around Reducing Rates
On the deposit side, Coale sees no way around reducing rates. "Credit unions are absolutely going to have to cut their cost of funds on CDs, money markets, and checking accounts to help make the numbers work."
But that may be difficult for credit unions that have already priced deposits at near rock bottom, or those credit unions in markets where banks have been aggressive in competing for funds. It may force credit unions to look more closely at further cutting operating expenses and even staff, suggested Coale.
Coale, who pointed out Amherst does not work with the corporate credit union system but provides investment services for natural-person credit unions nationwide, cautioned that corporates could be heading for further additional balance sheet challenges based on recent Moody's downgrades released in early February: "Out of the $108 billion in total senior downgrades, $59 billion were downgrades of Aaa securities. Out of the $59 billion in downgrades from Aaa, a staggering 91% of them were directly to non-investment grade," Coale shared.
"A lot of the issues surrounding the corporates were based on numbers as of November 30," said Coale, who suggested that some credit unions lack the expertise to manage their own funds and rely too heavily on corporates. "Think what's happened with bonds since then. Say something was AAA, now it's CCC. The problem gets bigger and worse."
