MADISON, Wis. - Times may be tough and many CEOs pessimistic, but analysts see plenty of opportunities for CUs.
“We’ve got a lot capital, thank goodness,” noted CUNA Mutual Economist Dave Colby. “Most (credit unions) are beginning from a position of strength. There are tons of opportunities out there.”
He advises CUs to “go out and search for those members to help.” “You won’t be able to help everyone,” Colby advised. “There are good people who got in over their heads. Credit unions are going to have to pursue those to help. But clearly, credit unions can’t help everyone. Really, really look for opportunities to help. That’s going to prove the credit union difference. And don’t get distracted by this gloom-and-doom stuff.”
NAFCU Economist Dr. Tun Wai agrees.
“This may be an opportunity for credit unions,” he said. “People remember the institution that gave them their first loan, and the loan when they needed it the most. But be careful. The lending institutions that have gotten into trouble is because they were lax in their standards. You have to be careful that people that take these loans have the ability to pay these loans.”
Brian Turner, manager, advisory services for Southwest Corporate Investment Services in Dallas, advises credit unions to make sure they are being proactive in their balance-sheet management by keeping a proper mix within their earning assets portfolio between loans and investments. “They must not compromise their credit standards to pursue volume of higher rates–that would be a short-term Band-Aid,” he said. “They have to be very conscientious in their share pricing to minimize long-term cost of funds. Having to offer premium certificate rates to attract liquidity not only compromises long-term earnings streams, it also adversely impacts the marketplace which they share.”
“They shouldn’t compromise their cash flow streams either, so prudent management of investment assets is important to maintain a strong liquidity profile,” Turner continued. “The good news is that wholesale funding rates are between 100 to 120 basis points cheaper than retail certificate rates, so alternative term funding coming from borrowed funds is a very good alternative–even in a recessionary period. Credit spreads will widen, the yield curve will steepen, and margin returns from the investment portfolio will increase so the percentage of revenue generation by the investment portfolio should increase. Given the credit union’s net operating expense – especially to what degree it relies on non-interest income to offset higher non-interest expense – will determine impact on net earnings.”
To the 66% of voters in a CU Journal poll who feel the U.S. is already in a recession, Turner observed, “Be careful you don’t deliver a self-fulfilling prophecy.”
“Those credit unions who rely on out-of-the-ordinary or venture into over-aggressive products and services are those that are most exposed to economic changes,” he said. “Credit unions that traditionally stay within their bread-and-butter find less adversity from volatile fee income or dramatic shifts in loan demand. They’re necessarily recession-proof, but they are better insulated through their balance-sheet allocation of credit/non-credit risk assets.
“We are in the risk business. Fortunately it’s a manageable risk business. The difference between those that succeed from those who struggle – they set a specific strategy to manage risk, not to try and manage against risk.”
Eastern Financial Florida CU’s Gary Lanier advises CUs to manage their risk and not to forget to look at the big picture. “Regardless of what is happening now, we still live in the best and most prosperous country in the world, and will survive this as we have every other time of economic trouble,” he said.
