The glory days of cheap deposits are waning.
Analysts told The Credit Union Journal that rising rates have hit the point where credit unions are going to have to bite the bullet and begin repricing savings accounts and certificates, especially since many banks already have.
"Through most of last year credit unions started getting more aggressive on certificate specials, and they've done an even better job of this year because rates are higher," observed Dwight Johnston, vice president of economic and market research for WesCorp. "We saw credit unions able to lag repricing their shorter-term offerings, and the banks were happy to lag the market, too, because it's very expensive to be competitive. But that has started to shift. We are starting to see a lot of pressure, both in local markets and from the INGs of the world, to reprice. We're still far from having to match the Fed, but there is pressure to raise deposit rates."
Warrenville, Ill.-based Mid-States Corporate CU is taking much the same view. "We have definitely seen banks-much more so in this recent cycle-being very aggressive to compete for dollars," Mid-States Senior Vice President of Investment Services Tom Moore suggested. "We are seeing quite a bit of competition for credit unions. Part of this is because clearly there are more players in the market, but, also we're seeing credit unions competing more with each other, too."
While financial institutions often are loathe to raise rates on deposit products, there can be a penalty for cheap cost of funds.
"Most banks and credit unions have been slow to raise their regular share rates, allowing them to maintain their margins," said Mark Schieffer of Suncorp, Westminster, Colo. "But right now it's pretty easy to get a Money Market Account mutual fund at 4% to 4.5%, so if you've got your regular share accounts at 2% that money is very vulnerable. I use my mother as a barometer for this. When she asks me, 'Why should I keep my money at the credit union at 1.75% when I can get 4% somewhere else,' I know we have a problem. Two years ago, credit unions had the deposit rate advantage, now we're behind and losing some of those funds."
Avoiding Being Cannibalized
And if a credit union tries to jump into the fray by repricing only select products, it runs the risk of cannibalization. Boosting CD rates while leaving regular shares or share draft accounts at their existing rates can lead to members simply moving existing money from one account to another, rather than bringing in new money.
"You see $20 million in those accounts and think you've done pretty well, but if all you did was get members to move money you already had from one account to another, all you've done is raised your cost of funds on $20 million without bringing in any new liquidity," observed Brian Turner, manager of the investment advisory division of Southwest Corporate, Dallas.
There are a number of factors contributing to credit unions' decision to lag the market on deposit rates. Turner pointed to the net surplus of liquidity credit unions have been working off for the last three years, subduing the need to be more aggressive on the deposit side of the ledger.
Johnston agreed. "Some credit unions are very liquid and don't have high loan demand, so they've opted to shrink a bit and let some money run off," he related. "But that's a tricky game to play. It can seem to make sense in the short term, but not always in the long term."
Add to that the fact that credit unions have gotten a little too used to the luxury of 1% to 2% ROA and high capital levels.
"Credit unions are not taking as much money to the bottom line because of the disparity in the curve, so they end up punishing their depositors," Shieffer noted. "In this environment, where the national average for capital is 11.2%, all this wringing of hands at ROAs of 56 basis points...people have gotten too used to high ROA. It just might be time to stop punishing depositors and raise their rates and accept a lower ROA."
With 11.2% capital under their belts, Schieffer continued, credit unions can afford to be cultivating greater goodwill-and reaching a bigger market in the process.
"Instead of being so ROA driven, credit unions need to get their capital right-sized by returning more to their members," he suggested. "They need to think long-term and work on growing their market share by reaching out to depositors."
Of course, sometimes credit unions are slow to move their deposit rates not so much out of a desire to prolong a healthy spread but because of how the decision-making process operates, noted Rodney May, vice president of member services at MidAtlantic Corporate in Harrisburg, Penn.
"At the corporate level, if the Fed is raising rates, we're right in line with that," May explained. "Our rates move almost simultaneously. From a [natural-person] credit union perspective, their decisioning is different. Some of those rates may be set at the board meeting, so there may be a delay between when the Fed raises rates and when the credit union raises theirs."
A common theme echoed by all of the corporates interviewed is that just as the Fed eventually had to stop lowering rates, it will eventually stop raising them. The black magic, of course, is in divining when that will happen.
"No one knows for sure, but what we are hearing is that the end [of rising rates] is near," May commented. "If we're not at the end, we're very, very close. We have more credit unions investing into longer term rates now."
But regardless of just how near the end is, credit unions will need to be cautious about making decisions based on "emotional" data from the market.
"Everyone seems to be preparing themselves for ultimately lower rates, but credit unions have to be very cautious with this," Turner advised. "We had many times under (former Fed Chairman Alan) Greenspan, when the rates just kept dropping, that people figured, 'all right, this must be the bottom,' and then they'd get trapped with these false bottoms created by the market. Now, we could have false tops. I like to say it's just like watching the water skier. Everyone focuses on watching where the water skier goes, but they'd be better off watching the boat, because where the boat goes, is where the water skier is eventually headed. All eyes are on the Fed, right now, but we need to have all ears on the Fed, too. Instead of focusing on the rates themselves, focus on what the Fed's objective is-to stimulate long-term economic growth without inflation."
Attention, Rate Shoppers
The good news is that there were some important lessons learned during the long spiral downward that credit unions have been able to implement during this recent spiral back up.
"What came out of such a low-rate environment is that credit unions have learned more, they've shopped around more and diversified their portfolios," May commented. "They're not just parking money in the over nights."
And they've learned the value of using strong ALM tools and shocking the balance sheet in a variety of tests to see how it withstands different what-if scenarios, the experts agreed.
"If you've been around this long enough, you've seen these same trends before," Moore noted. "We have an analysis that we offer that allows credit unions to go back 15 years to understand how their deposit base has reacted in the past to similar moves in rates. All of the corporates have a lot of tools credit unions can use."
