Credit unions are generally overcapitalized and need to leverage their capital to grow and gain market share, according to one expert.
Peter Duffy, associate director at Sandler O'Neil + Partners, L.P., during his remarks at Corporate One FCU's asset liability management conference, urged credit unions to pay attention to this trend.
Citing an imbalance of supply and demand as a major problem for all financial institutions, but particularly credit unions, Duffy observed that increased consumer choice is driving loan yields down and share rates up, putting pressure on credit union margins and earnings. He said he believes continued consolidation in the financial services industry will reduce the imbalance and restore order in pricing power.
"Analyze your success versus local competition, not peer competition. Peer analysis doesn't tell you how to build market share," he said.
Duffy noted that competitive analyses conducted in many major metropolitan markets reveal that banks and credit unions are neck and neck in terms of yield on earning assets, cost of funds, and return on assets, but banks are pulling away on net interest margin.
What differentiates the market leaders from their competition is their performance in areas of capital management, investments, and balance sheet management.
"Leverage your capital to enable growth. Aggressively market your loan offerings. Consider loan participations or purchase loans from other institutions. Manage your investment portfolio in a more aggressive manner. If a credit union can grow its balance sheet by making more loans and buying more investments, and do so without sacrificing earnings, it can translate that capital into growth," Duffy said.
"Over the years, consultants have made thousands of dollars advising credit unions to stay short on the balance sheet to keep the regulator off their backs," Duffy added. "The result? The regulator is off their backs on asset/liability management, while credit unions make less money than the competition, study their performance versus peers, and never figure out why they're less financially competitive," he said.
Corporate One's Asset/Liability Management Conference, a two-day forum covering issues affecting credit unions' balance sheets, featured speakers from the National Credit Union Administration (NCUA), Charlie Mac, and ALM First Financial Advisors, LLC.
For info: www.sandleroneill.com or www.corpone.org.
