Credit unions are starting to surrender some of their resistance to raising their savings rates as the Federal Reserve continues to push short-term rates higher.
That resistance, according to industry observers, has allowed credit unions to maintain a healthy return-on-average assets, even as the yield curve flattens while short-term rates move closer and closer to long-term rates-so-called margin compression.
But other pressures-namely competition for funds from banks and others-are forcing credit unions to slowly lift their rates, too.
"Credit unions have been lagging behind in pushing up the rates that they've been paying on savings," said Bill Hampel, chief economist for CUNA. "As a result, the spreads between what credit unions are paying and what banks are paying have narrowed over the past 18 months."
During that time, the margins between credit union rates and bank rates on regular savings-always trumpeted by credit unions as a better deal-has narrowed, according to DataTrac Corp., which follows rates for 8,000 financial institutions, including 1,000 credit unions. As banks and other competitors have slowly lifted their rates on regular savings, checking and money market accounts in response to the rising-rate environment engineered by the Fed, credit unions have been much slower to respond, according to Hampel. As a result, the margins on those accounts have narrowed considerably during that time, making credit union accounts less of a bargain, he noted.
Credit unions, he emphasized, still pay better rates, but the difference is not as great as it once was. For example, the margin on regular savings rates, for which credit unions typically pay 30 basis points to 50 basis points higher than banks, had shrunk to just 23 bps last week, with credit unions averaging 0.8% and banks 0.57%, according to DataTrac. And on checking accounts, the margin had shrunk to just six basis points last week, 0.48% for credit unions to 0.42% for banks.
The hesitancy to raise savings rates has succeeded in propping up credit union profitability, but it has also had another expected result-it has slowed the flow of funds into credit unions. In fact, share (deposit) growth for credit unions slowed to just 2.8% for the first half of the year, according to CUNA. "That's incredibly low," said Hampel, of the 10-year low.
Last week's Fed action, in which the central bank raised the target rate for overnight FedFunds by 25 basis points again to 3.50%, will put even more pressure on credit unions to adjust their rates. As Hampel noted, the Fed action will soon push the average rate for mutual fund money market accounts to the 3.50% target, a far cry from the 1.3% average being paid by credit unions on their money market accounts.
But signs have emerged over the past few weeks that credit unions are adjusting to market conditions, according to Jeff Taylor, an economist at NAFCU. "The gap on short-term rates has been starting to widen, so credit unions realized they have some catching up to do," he said.
DataTrac figures show the average paid by credit unions on regular share accounts finally climbed back above 0.80% last week, after hitting an all-time low of just 0.72% last year. Average rates paid on checking and money market accounts are also starting to climb, noted Taylor.
Credit union boards and managers are going to have to decide in the coming months which is the more important goal: maintaining their profitability or continuing to grow by attracting new funds. Considering that the industry's average ROA continues at a healthy 90 BPs and net capital has once again risen to a strong 11%, the choice is an easy one, according to Hampel, who recommends that credit unions let their net income fall, in return for attracting more funds.
