BIRMINGHAM, Ala. — Credit unions won't get much help from a slowly recovering economy during the second half of the year, say analysts who foresee minimal GDP growth and CUs still having to slug it out to find ways to drive ROA.
Key areas of focus, experts say, will be increasing efficiency, driving fee income and streamlining lending processes along with checking offerings.
It will also be important to pull new levers to buoy auto lending — which could see a decline — while not allowing over-regulation to slow progress.
While Dennis Dollar, principal at Dollar Associates, is concerned that the economy won't do credit unions any favors this year, he is bothered most by what regulators are doing in response to the financial crisis and how CUs have changed their mindset.
"The economy continues with slow improvement, but certainly this has been one of the slowest recoveries of recent history," said the former NCUA chairman. "What is important to recognize, however, is that it is impossible to regulate an economy or an industry out of an economic downturn."
Dollar stressed that economies and industries must grow themselves out of a downturn.
"They cannot be regulated into prosperity," he said. "Hopefully, we will see some balance put into the extensive and expensive regulatory activism the entire economy — and especially the financial services industry — is experiencing today."
What credit unions need to do most, according to Dollar, is change their approach to business as opposed to taking any specific action.
"Credit unions need to certainly take today's activist regulatory and supervisory environment into consideration, treating it with respect," said Dollar. "However, they cannot worry about what a risk-averse examiner will say or how much the burden of the next regulation will cost to keep the credit union from pursuing the strategic goals needed to grow. Growth is essential for the long-term safety, soundness and marketplace viability of a credit union."
Therefore, whatever the strategic growth need of the credit union might be, Dollar said successful shops, regardless of size, will be those that develop a solid plan for how to move forward with their initiatives within the framework of a tough regulatory and supervisory environment.
"They cannot allow the fear of regulation or the next examination to make them so risk averse that they forget their job is to manage risk — not avoid it — and to grow wisely, bringing economies of scale and enhanced member service into their strategic actions," said Dollar.
Rising Rates=Falling Capital
When the Fed's tapering stops, expect short-term rates to rise, said Michael Moebs, economist and CEO at Moebs Services in Lake Bluff, Ill., who predicts that rate increases will begin at the end of the year or the start of 2015, showing up in short-term loans first.
Moebs contends that rising rates could make it even harder for credit union capital to keep pace with asset growth, a problem the economist said CUs already face. "They just are not making enough money."
Despite the initial rate rise benefiting credit unions with loan rates rising before deposits, soon enough, Moebs said, CUs will pay a lot more for deposits because of hundreds of millions of dollars shifting out of checking accounts, which are at record-level highs, to higher-paying CDs. There will be fierce competition to keep checking accounts and get CD dollars, he said.
"Initially margins will grow and everyone will feel like they are in Fat City," said Moebs. "And then, all of a sudden when deposit rates go up the problem will hit them in the face like a two-by-four."
Not only will CUs pay more for deposits but they will get more CD money, which will shrink capital.
Moebs said it's time to concentrate on reducing expenses and increasing fee income. And a critical step to do both is streamlining checking.
"Credit unions have too many checking account types," said Moebs. "Drop down to two accounts — one interest bearing and one non-interest bearing. We worked with Bank of America the last three years in restructuring their checking line. They had 11 checking accounts when we started with them and now they have two. They put the new structure in place in 2013 and they are now reaping the benefits."
Protect Auto Lending Volume
Auto loans were credit unions' top loan growth category last year, at 11.25%, points out Bill Handel. The VP of research at Raddon Financial Group, Lombard, Ill., said new car sales this year indicate that in 2014 CUs may not see those same kinds of loan results.
The resurgence in CU auto lending has coincided with double-digit increases in new vehicle sales in 2010-12, according to Handel.
"Last year vehicle sales growth was 7.5% and this year vehicle sales are up by 1%, year over year," he said. "When you think about lending and you see that slowdown in vehicle sales, you get a little concerned when so much of your loan growth is driven by this category."
Handel also sees competition for auto loans increasing at a time when there appears to be a drop-off in buyers.
"The industry has to make the lending process even more efficient, look at technology," advised Handel, who said banks and credit unions generally have a "clunky" lending process. "I think if we look closely at most financial institutions' data we will find a high rate of consumer abandonment in the lending process. Someone starts down the path and simply opts out because the process is inefficient."
Handel said technology is needed to simplify the lending process for the member. "I think we ask the borrower for the same information three to four different times, which is crazy. You are turning people away. We want members to comply with our needs, when we should be making the process as simple as we can for them."
Handel recognized that prospective auto loan borrowers can walk away, too, when lured by dealers and other lenders. He agreed that programs that keep the borrower close to the credit union through the car-shopping, car-buying and loan process is what's needed at all CUs.
Handel cited the work of San Antonio, Texas-based USAA, which not only helps consumers find the car, provides financing and insurance, and then helps with the resale of the auto when the borrower moves on to the next vehicle."
"Credit unions should not be thinking as if they are providing vehicle financing, they should be thinking about how they can help members solve a problem, which is transportation," said Handel. "We have to think more broadly."
