Fight for deposits eases up – but just barely
The pressure for credit unions to shore up funding has eased – but just barely and probably only temporarily.
The industry’s loan-to-share ratio has ticked up since the financial crisis more than a decade ago and is currently hovering in the mid 80% range, having stood at just over 85% at the end of 2018. That was a sign of loan demand gaining steam and consumers moving deposits from the safety of the financial system to other investments.
But credit unions have since boosted efforts to gather more deposits while demand for credit begins to taper off. Because of that, there could be less pressure to secure funding for the rest of 2020, allowing CUs to pursue more core deposits rather than chasing rate shoppers.
“The liquidity picture has changed dramatically,” said Bill Hampel, a credit union consultant and economist. “Credit unions are no longer in need of liquidity.”
Total four-quarter loan growth was 6.2% in the fourth quarter of 2019, according to data from the National Credit Union Administration. That’s up slightly from the 5.9% four-quarter growth recorded in the third quarter but down significantly from the 9% increase posted a year earlier.
At the same time, four-quarter growth for insured shares and deposits was 8.2%, the biggest gain posted in the fourth quarter going back to 2009, according to NCUA data.
The loan-to-share ratio stood at 84% at the end of 2019, according to NCUA data. That’s down from 84.1% in the third quarter and 85.6% a year earlier.
The industry could see further softening of the loan-to-share ratio because of the coronavirus. There could be less loan demand if the outbreak sends the economy into a recession. Consumers may also decide to park their savings at financial institutions rather than risk the uncertainty of a stock market that has been swinging wildly.
“How bad will it get?” said Greyson Tuck, a director at the consulting firm Gerrish Smith Tuck. “Obviously the impact directly relates to the scope of the problem on the lending side. As it relates to deposits, you could have a replay somewhat of 2008 where people flee the markets for the safety of cash.”
However, credit unions will still have to work to attract new low-cost deposits, experts said. Most financial institutions depend heavily on net interest income so they are motivated to lower their cost of funds as much as possible while maximizing what they can charge for credit.
But many credit unions still have relied on growth in higher-cost forms of funding, such as share certificates. In the fourth quarter, shares and deposits increased by roughly 8% with regular shares ticking up 3.5%. However, other deposits surged by about 11% with share certificate accounts rising more than 20%, according to data from NCUA.
In 2019, other shares and deposits made up roughly 49.4% of credit union funding, according to median data looking at credit unions with between $500 million and $5 billion in assets from the Kafafian Group and S&P Global Market Intelligence. This category of funding includes money market accounts and share certificates.
In contrast, share drafts to total deposits was 18.1% and regular shares to total deposits was roughly 31.4%, according to median data.
“I think the deposits that have been coming in haven’t been of the checking account variety,” said Jeffrey Marsico, executive vice president of the consulting firm Kafafian Group. “It’s more of the rate shoppers and CDs.”
That means credit unions could focus more on gathering cheaper core deposits, rather than other more expensive funding types, going forward.
Affinity Federal Credit Union in Basking Ridge, N.J., is located in the highly competitive New Jersey market. Because of this, the $3.5 billion-asset shop has a robust liquidity-management program that relies on nonmember sources of funding, said Frank Madeira, senior vice president of finance. Its loan-to-share ratio typically hovers around 115%, he added.
“We look at the market very closely,” Madeira said. “We are not the best rate out there but we are among the better rates. We also try to differentiate by innovating our products.”
Earlier this month Affinity launched a new savings account, called SmartStart, that has an inverted interest rate structure. It offers 2% on balances under $2,500 with that rate decreasing as the account balance increases. The product is meant to encourage consumers who typically don’t have an emergency fund to save more.
The credit union will also launch a new rewards checking account in the next month or so. Through that, members will earn cash back by using their debit cards to make purchases.
“It gets expensive and there’s lots of ideas out there,” Madeira said of trying to be innovative to gather new deposits. “We want to keep it simple. That’s a big part of our strategy. We don’t want to make members jump through hoops.”
A boost to fee income is another reason credit unions are likely looking for core deposits gathered from checking accounts rather than other sources, said Vincent Hui, a managing director specializing in strategic planning at the consulting firm Cornerstone Advisors. This can help credit unions gain fee revenue from sources that are invisible to the consumer, such as interchange income.
“I think generally speaking across the board credit unions want low-cost deposits,” Hui said. “It will help their net interest margin. And if you are able to get checking accounts, you might be able to get additional fee income so there is a somewhat of a double benefit.”