As competition for member deposits and loans increases at a growing rate, some credit unions remain reluctant to use the wholesale markets to expand their profitability and member service. As an industry, we seem to be very good at meeting our members' direct needs; deposits are attractively priced, as are consumer loans. And we're improving our ability to provide more real estate loan opportunities to our members.
However, in the process of true balance sheet optimization, including optimizing liquidity balances, it is rare that member activity (or "retail" activity) can solely build the best balance sheet available. This is becoming increasingly true in this market, characterized by tight liquidity and increasing interest rate risk.
This is why some credit unions are actively engaged in wholesale activities using the investing and lending markets. And as competition increases further, most credit unions will need to get more accustomed to using the wholesale markets, either tactically or strategically, in order to keep pace.
These credit unions are finding that having the ability to both lend and invest in the wholesale markets gives them greater flexibility in meeting their financial and member service goals, and helps them stay in step with their members.
"Wholesale" activities are those investing and lending activities that are not directly tied to the credit union's members. Certainly borrowing funds from your local corporate, or buying certificates or securities would qualify as "wholesale." However, other examples exist as well. For instance, buying loan participations clearly does not affect the credit unions members, and neither does selling loan participations (assuming, of course, that servicing is retained).
These activities are as far removed from the member as buying a corporate credit union certificate, or borrowing from your corporate or the FHLB, and yet they still serve the same purpose of improving the credit union's financial well being and, ultimately, their member service.
However, maintaining active relationships with the myriad of non-member service providers can be a daunting task. And while this task is only made more difficult by the current mantra of expense control, credit unions must be able to properly maintain their liquidity equation. And, as is usually the case, when it comes to liquidity, every credit union is different. For example, even though liquidity is, in fact, tighter today than in many years past, many credit unions still have more than enough cash on hand and are seeking ways to deploy said cash to achieve a higher (and more rewarding) rate of return. The statistics bear this out.
For all credit unions with more than $25 million in assets, 24% have loan-to-share ratios greater than 90%, a sign of potential liquidity needs. However, another 21% still have loan-to-share ratios less than 60%.
Hence, in nearly any market environment, there exists a group of credit unions with excess liquidity wanting higher returns, as well as a group with a need to find new avenues of liquidity that can be used to meet their members' lending demands.
So why aren't more credit unions considering wholesale alternatives? Certainly lack of familiarity with the products available comes into play. However, most credit unions run a pretty lean staff, which makes it more difficult for providers of wholesale alternatives to get an audience. So the message to credit union vendors is clear: if you want to partner up with this industry, you will need to align your business for their convenience.
For example, in most cases, the person within a credit union that does the investing (wholesale) also handles loan participations, and long-term and short -term borrowing. Unfortunately for their suppliers, they also generally have heavy member-related responsibilities as well.
So guess who takes a back seat? The amount of time they can dedicate to non-member activities is very limited and rather than having to deal with multiple providers to meet these needs, time pressures are forcing these decision-makers to pick only those providers that can bring it all together in a cohesive and strategic manner.
For vendors, this likely will mean abandoning the single product or service focus that many of you have today, and providing a deeper offering, either directly, or by entering into more B-2-B partnerships designed to provide an array of services in a streamlined fashion (or both).
And for credit unions, think of it this way. Serving your members will always be your No. 1 priority. But, the ability to operate efficiently in both the retail (member-related) and wholesale (non-member related) markets will allow you to maximize the opportunity that your members are providing to you, no matter where their next step takes you.
Ron Araujo is Vice President, Investment Strategies and Education at WesCorp. He can be reached at raraujo
