MADISON, Wis. - The latest reductions in the federal funds rate should only help credit unions to increase their earnings, according to an analysis by two experts, with one cautioning that credit unions must be particularly aggressive in managing their costs of funds.
CUNA Economist Steve Rick noted banks remain risk-averse and mortgage rates have only remained steady or risen, with the yield on assets at 6% while money market funds are paying between 2% and 3%.
“Depository institutions will lower their deposit interest rates in response to the Fed’s rate cut,” said Ricks in a statement released by CUNA. “This will lower their cost of funds faster than any reduction in their yield on assets, pushing net interest margins up. Greater earnings will allow for faster recapitalization of the financial system. Higher capital levels will encourage more lending, investment and hence economic activity.”
Rick said his advice to credit unions is to continue “originating,” but to also ensure the loans are good with solid underwriting.
Rick also echoed the sentiments revealed one week earlier in a poll conducted at cujournal.com and said he also believes the economy is in recession.
Meanwhile, Southwest Corporate noted that credit unions should be prepared for increased liquidity as the result of several factors over the near term. Brian Turner, manger of advisory services with Southwest Corporate, is projecting that spread cash and consumer/mortgage loans will have increased to as much as 340 and 375 basis points, respectively, as spreads have grown wider. Moreover, he pointed to the spread on short-term agency-issued mortgage securities that have widened to 120 to 140 basis points to cash, and may be higher with some structures. ”We have been preaching since last August the need to take careful examination of both non-term share and term certificate rates going into the environment we now enjoy,” he said. In a statement. “Many credit unions have been reluctant to lower their term rates for fear of lost market share. This typically inflates the overall rate environment in their competitive market place. As we enter into this new phase, there will be a time when the credit union should consider extending its funding duration in anticipation of rising rates.”
Turner recommends credit unions use structured-term offerings to lower their long-term cost of funds going into the next rate cycle. That will help offset the rates paid on member term certificates as their spread to borrowed funds widens, he said.
