Rising Rates Likely Reason For Drop In CEO Confidence

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Concern over rising rates eating into earnings is behind the pessimism CU CEOs are showing about 2005.

A December survey by Southwest Corporate FCU showed its CU CEO Confidence Index at 38.75 points, the lowest for 2004 and down from a high of 47.40 in July. The survey reflected 140 CU CEOs' attitudes. In the survey, CEOs are asked questions that include assessing their credit unions' situations at the present and six months from now and then asked to rate their confidence on a 1 to 10 scale.

"CEOs felt that their members' financial situation may be improving just a little bit, but they (credit unions themselves) will face a tough year because the spread is going to be tight. They're not feeling great about things yet," said Terry Young, a spokesperson for Southwest Corporate.

Results appeared less optimistic than those published in a separate survey, also released in December, by the CEO association Business Roundtable. That survey showed CEOs expected the economy to continue growing at a healthy pace in 2005 with a majority saying that sales will continue to rise.

Ellen Hein, CEO at Texas Tech FCU who took part in Southwest Corporate survey, said that while she expects the economy to expand even faster than last year and to grow by as much as 5% this year, credit unions will face the challenge of trying to attract longer-term deposits and shorter-term loans.

"I was somewhat neutral on my particular comments (for the survey). I didn't have a great deal of optimism because we are challenged with trying to balance our risk to get longer-term deposits," she said.

Nevertheless, she said that an improving economy should bring in demand for loans and higher rates may attract more depositors.

She said that about 60% of loans in her portfolio are fixed while 40% are adjustable. The credit union, whose members include faculty and staff of Texas Tech, said the variable rate products include mortgages and government-backed student loans.

"If we can get two or three-year deposits in this environment in which the Federal Open Market Committee is increasing interest rates on a regular basis, this would help," she said. She said she expects raises of 25 points at each of the next two of the FOMC meetings and another 25 basis points increase by the end of the year for a total rise of 75 basis points in 2005.

Jeff Mc Daniel, CEO of First Financial Credit Union of New Mexico, didn't take part in the survey, and said that he doesn't find it as useful because the economy in New Mexico is different than in Texas with substantial government spending. "When there is a recession we don't see that as much and when there is a recovery we don't see that as much either. I'm optimistic about my credit union's future because we have a lot of our loans in adjustable-rate form. About 45% in real estate adjustable, many recreational and car loans that are adjustable. We are in better shape than most credit unions,'' he said.

He said his credit union uses the interest rates on six- and 12-month Treasuries as benchmarks to then set loan rates, and that his credit union is not as concerned about the outlook for long-term interest rates.

"We anticipate the Fed will continue to raise loan rates at least 125 basis points for this year,'' he said.

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