Filson: 'Corporate Crisis Is Over,' Expect Assessments To Shrink
WASHINGTON-Costs to bail out the corporates and replenish the NCUSIF over the coming years will be below 2010 levels, and will result in assessments below what many credit unions are bracing for, according to Callahan & Associates.
During its Q2 Trendwatch webinar, the consulting firm said it is forecasting the assessment to CUs over each of the next two years will be approximately 15 basis points. Callahan's said the "corporate crisis is over" and the NCUSIF is currently strong enough to cover projected CU losses. Pointing to ROA of 42 basis points for the 26 retail corporates this year, an increase in share balances as well as stable capital ratios, Callahan & Associates President Chip Filson noted that the bulk of the corporates' troubles are behind them, and they are now "in the resolution phase. They are back at one of the highest earning rates because of this very low interest-rate environment. They have a very good spread...The so-called legacy assets are very attractive assets in this historically low-rate environment."
In addition to margin expansion, corporates are controlling their expenses across the board, Filson added.
As far as premiums to address a potentially shrinking NCUSIF, Filson believes those would be assessed more to cover poor earnings in the insurance fund's portfolio due to record-low investment rates not accounted for by the fund's interest-rate model. "We believe (loss provisions) are more than accounted for as we go forward. That is why we think a five-basis-points assessment for the next year or two may be reasonable to cover what are in essence operating costs."
Performance Drives More Optimistic Outlook
CU performance in 2010 is also driving a more optimistic outlook on the insurance fund's future. CU ROA is up 12 basis points year over year. Operating expenses are at the lowest levels in five years (3.06%). Net interest margin has widened over the last five quarters (3.26%) and now covers the daily cost of doing business. And asset quality shows continuing improvement since the end of 2009.
But a big problem-what to do about growing liquidity, low investment rates, and a flat lending environment-could be around for a while. According to John Oliva, VP-Goldman Sachs Asset Management, the economic recovery will continue to be slow. He pegged GDP growth at 1.5% for the rest of the year and well into 2011, and said the Fed won't budge on rates soon.
Filson summed up the issue: "How do we convert the $300 billion in investments, two-thirds of which is invested for less that one year and therefore earning probably 50 basis points or less, into a way to help out members grow by growing loans?"