What To Do About CUs' Evolving Purpose
Credit unions are evolving from promoting thrift by their members to promoting the financial well being of their members, according to one analyst.
Dave Colby, assistant VP with CUNA Mutual Group and the company's chief economist, said credit unions not only must continue to provide the competitive alternative in consumer borrowing and savings, they must expand this philosophy to provide a competitive alternative in serving the retirement needs of current and potential members.
"If credit unions take these challenges, it would dwarf the billions of dollars they already have saved their members," he told NACUSO's annual meeting. "Credit unions are heading down new roads, but if they can meet the challenges, there are a lot of profits."
Colby began his session with a detailed look at the current and future U.S. economic picture. He said the three baseline assumptions for the forecast are: productivity gains by workers have peaked and job creation is needed to meet rising demand; Congress will not allow the personal tax reductions passed in 2003 to expire, and inflation will remain under control as oil prices slowly decline.
The forecast calls for Gross Domestic Product (GDP) growth of approximately 5% in 2004, followed by three years of steady growth of about 3.5% annually. Job growth is expected to pick up after eight stagnant quarters. Vehicle sales will continue to rise, with trucks-a category that includes minivans and SUVs-increasing market share versus automobiles.
A Cooling Housing Market
As interest rates rise, Colby foresees a cooling in the housing market. "Higher rates limits the number of people who can buy homes; especially at the low end-first-time buyers," he said. "Mortgage refinance activity is pretty much going to dry up."
The forecast calls for inflation to remain at an annual rate between 1% and 2% from 2004 through 2007. He said there are some risks for spikes in inflation due to oil supplies or prices, gasoline refinery problems, or terrorism, but those "should be temporary."
As for the direction of interest rates, a topic of much interest to credit unions, Colby suggested the biggest influence will be Fed Chairman Alan Greenspan's likely retirement next year.
"Greenspan's No. 1 goal is to leave the economy in good shape," he said. "I don't think the Fed will raise rates before year-end, or possibly a half-point at the August meeting, unless something shocking happens such as a runaway inflation number."
Colby expects the 10-year rate to reach 4.75% in 2005, and 5% in 2006.
This baseline forecast has a 50% probability of occurrence, he said. There is a 20% probability of a stronger recovery, and a 25% probability of lingering slow growth. The remaining 5% is unknown.
"Terrorist events are not included in this forecast," he explained. "With the two major party conventions and the Olympic Games in Athens, there are many opportunities for terrorists this year. Consumer uncertainty will fall as jobs pick up, but the global nature of the economy and terrorism mean less control."
Colby said the changing economic picture will have three effects on CUs: reduced asset growth, a need to replace income from mortgage refinancing, and compressed spreads.
The first and third items on this list are related, he said. As interest rates rise, when certificates of deposit come up for renewal, members will demand the market rate, or they will take the money out of savings and invest it in the stock market. As a result, asset growth will slow "quite a bit."
Loan growth for CUs has improved three straight years, and 2004 will see loan growth over 10% for the first time since 2000, he predicted. However, Colby warned many auto loans were paid off during the refinance boom the last two years. "Loan portfolios will fall off quite a bit in the next four years. Many credit unions will sell off first mortgages to avoid interest rate risk."
Gross spreads will continue their long-term decline due to competition. Consumer knowledge has risen due to the Internet and other media. Consumers have become great negotiators, he said, which has pushed loan rates down.
According to Colby, credit unions must be ready for the convergence of three major waves: the information/digital wave, changes to the financial services sector, and a demographic wave.
"We need to be prepared," he said. "All too often, we are forced into a reactive mode."
The impact of technology is underestimated every year, he believes. The capital markets have become much more efficient than CUs, leaving credit unions with a "lot of catching up to do." Not that things are getting any easier-the rise of online entities such as E*Trade and ING Direct mean the competition is increasing.
Probably the biggest wave, Colby said, is demographics. Credit unions have constantly evolved with the Baby Boomer generation-a group that is preparing to enter retirement.
"Are credit unions ready to meet the service needs of Boomers in their next phase? They have to look at themselves and re-evaluate," he said. "There needs to be a sea change from promoting thrift by their members to promoting the financial well being of their members. Promoting thrift has been the credit union philosophy, but promoting financial well being should be."
Retiring Baby Boomers will need a lot of advice in preparing for retirement. Colby said most people don't know the risks their assets are exposed to-assets they spent their entire lives accumulating.
A Cooling Housing Market
"What are credit unions doing to prepare Baby Boomers to make the right financial decisions? It is a huge, huge challenge," he said. "These risks include taxes and inflation, not just a catastrophic event."
Other issues CUs must deal with in the coming years include finding replacement borrowers, controlling expenses, and regulatory stability. Colby said if CUs know regulations are not going to change, they can design a successful business model. "This is another opportunity for CUSOs. They have done an excellent job, but they need to step it up," he said. "Credit unions have a cooperative history. Let's tap into that and reinvigorate that."