LOS ANGELES-One analyst is expressing concern that a second wave of home foreclosures could lead credit unions to start putting tactics before strategy and to make short-term decisions related to capital.
"I'm seeing a reluctance to make longer-range decisions and that concerns me," said Alec Berkman, chairman and chief innovation officer for Executive Compensation Solutions. "People in decision-making capacities are beginning to freeze up and shy away from what they set out to do with capital for the long term. Long-term plans should have anticipated some volatility in the market. And your decisions to deploy your capital ought not to change in the long run."
Berkman expects a second round of foreclosures, "bigger than the subprime," will affect decision making. "There is another wave of foreclosures that all financials, including credit unions, are going to have to weather," said Berkman. "These are the loans that are looked on as the norm. The standard 30-year fixed-rate loans. The default rate is so high on these right now."
Berkman said the foreclosures aren't from people who were given loans that they can't afford. The problems are resulting from the economy that has limited borrowers' ability to repay, and reduced home values to eliminate refinancing and tapping equity as options.
Berkman said that a tougher year for credit unions in 2009 should not distract CUs from growth goals while they address the short term.
"You certainly have to factor into your decision making the things that are in front of your face," acknowledged Berkman. "So we will see the expense cuts and hiring freezes. But you have to balance those against your longer-term strategic targets."
Berkman subscribes to the thinking that "strategic use" of capital to expand services will take share from banks today, and emphasizes that those that strive to be more convenient to consumers will be the most successful. "Who can be closest to the member? What can be structured to look and feel convenient. Is it more branches? The Internet? It seems to me that long-range capital investments in technology that drives convenience is a wise way to go."
Berkman acknowledged that credit unions will likely have to "eat into their capital" to continue to grow. But a "prudent" use of it is wise, and current capital ratios considered standard should be reconsidered. "All of the gauges have been reset. The traditional 10% net worth is not applicable in a market like this in which ROA is shrinking. So, to try to maintain a 10% net worth is not necessarily in the service of your long-range goals. You have to significantly modify the old thinking of what those capital targets should be. And I think a lot of boards are stuck on those old targets."
For info: www.ecs-m.com.
