Tactics Pitched For Avoiding Risk, Increasing Earnings
LOMBARD, Ill.-While CFOs told Credit Union Journal they are not going long on investments to chase yield (see related story), Raddon Financial Group fears many are, and recommends fundamental changes in how CUs do business as better alternatives to improve earnings.
Bill Handel, VP of research and development for Raddon, said that credit unions need to look at changing their loan focus-by looking more toward credit cards and small business lending-and strategically drop rates to avoid impacting the most valuable members.
"It goes back to the issue many credit unions are not willing to address, and that is managing growth," Handel said. "Credit unions believe that deposit flows are out of their control, so they simply allow the dollars to run in and look for ways to deploy them."
Instead of reducing rates across the board and upsetting the most profitable members, Handel recommended employing differential pricing. "How do you make sure you provide rates of return to reward members who are keeping the right types of relationships with you, while in general dropping deposit rates and managing cost of funds more effectively, and staunching the deposit inflow?"
Handel acknowledged the concept of such tiered pricing remains difficult for many within the credit union community to embrace
One strategy credit unions must not entertain, however, is going long on investments to chase yield. "What scares me the most today is that too many credit unions are going out longer on the yield curve," Handel said. "When that yield curve turns around they will be in big trouble."
To improve the picture on the loan side credit unions must strongly consider alternative ways to disperse the liquidity, urged Handel. With the inability to portfolio first mortgages, and with auto loan demand down, CUs must look at credit cards, home equity, and small business loans. Handel suggested that many credit unions that sold their credit card portfolios in previous years now have no-compete clauses that have expired and can re-enter the credit card business. He reminded it's also a great time to take advantage of banks' vulnerabilities in the credit card arena due the CARD Act.
"We need broader diversification," concluded Handel. "That includes business lending. Typically when the economy moves into recovery it is due to the formation of small businesses."