ARLINGTON, Va.-Decisions regarding the function of capital are expected to get a lot tougher for credit unions in 2009 as many wrestle with shrinking net income, and others are content to keep that number flat.
"If you are conservative, you have a tendency to keep the capital at your institution," offered NAFCU Director of Research and Chief Economist Tun Wai. "If you're thinking about serving your members, you have to worry about whether a high amount of capital is optimum."
But ROA ratios, which are expected to shrink further in 2009, will challenge credit unions to grow without dipping into capital, which may not be optimal.
"We are in a squeeze right now," reminded Wai. "This year will be a continuation of low ROA. That means you have to have capital so you can take a hit in order to be able to survive. You won't have to liquidate an investment and take a loss on it."
Wai suggested credit unions could face liquidity issues in 2009 if they simply sit on capital and allow it to erode with margins falling.
Keeping deposit rates high to compete with bank pricing could be a mistake.
"The way you price your loans and savings ought to do with your ALM aspect of whether you have enough funding," Wai said. "In a slow economy where income is not so great, you have to worry more in terms of your members' sensitivity and willingness to shift funds."
Anytime credit unions look at growth, Wai said they should do so with a long-term perspective. "Just to say I'm getting into this business because members are demanding it and everyone has left the field is not sound logic. You have to think how much it costs to gear up for those services and you may not earn the revenue immediately. Think longer term than shorter term because this economy will turn around at some point."
Keeping high capital levels is a great way for the entire industry to share the value of credit unions with economic decision-makers, offered Wai. "It distinguishes us from other lending institutions and has so much political value in terms of the 50,000-foot-level discussions going on in Washington."
