LAKE FOREST, Ill.—Here are three trends to watch as 2017 gets underway:
- Credit unions are adding branches while banks are reducing locations.
- CUs could surpass thrifts in total assets next year.
- And if banks under $10 billion have their corporate income taxes eliminated under the new administration, they could cut loan rates by 50 basis points or pay 50 BPs more on deposits.
Those are three observations made by Moebs $ervcies in a new analysis of 2016 Call Report data from banks, CUs and thrifts. As 2016 comes to a close, Michael Moebs, economist and CEO at Moebs Services, is offering his forecast for the entire 2017 financial services industry.
“Financial institutions in the United States are now fewer in number than in 1904, 112 years ago,” said Moebs. “Population in 1912 was 82,166,000 and the number of FIs was 12,839, or about 6,400 people per FI. Today financial institutions number 11,985 and population is 324,119,000 with 27,000 people per FI.”
Overall, the total number of FI branches has fallen in recent years to 113,006 which is approximately the same number 10 years ago, said Moebs. The number of bank branches has fallen 6% since 2012, while the number of credit union branches has increased 5.8% in that period.
“It may be less costly for a credit union to buy a bank branch than build or lease,” said Moebs. “Conversely banks have a ready market for branch sales with credit unions. Do it right and both banks and credit unions can win.”
Assets of credit unions and thrifts in 2016 are $1.3 trillion, which is dwarfed by the $15.5 trillion held by banks. Since 2015, bank assets have grown 4.8%, while CU assets have grown 6.1% and thrifts 6.3%.
“Next year will be the first-time credit unions exceed thrifts in total assets and move into second place behind banks,” predicted Moebs, before adding, “Politically significant?”
For banks and thrifts with assets less than $500 million, year-to-year total assets fell 2.60%. Only those credit unions below $100 million in assets showed a decrease in assets, at 2.58%.
“The actions taken by some credit unions to buy community banks, especially those under $500 million in assets, is good preparation for a potential change in the fabric of financial services, and a good investment if the price is right – don’t forget thrifts,” said Moebs.
The increase in the Fed funds rate in December 2015 triggered a 0.05%, or five basis points, increase in interest income for all financial institutions, and a two-basis-points increase in interest expense. However, adding provision for loan losses and security gains and losses, the net interest margin (NIM) decreased for all financial institutions by two basis points. Banks had a large decrease in NIM offsetting the increases in NIM by thrifts and credit unions, explained Moebs.
“The banks are more reflective of the NIM and all financial institutions should expect net interest margins to continue to fall in the future,” said Moebs. “There will be a few exceptions.”
Non-interest expenses for the first time since the start of the Great Recession in the fall of 2008 is less than NIM for all financial institutions. Banks cut their expenses 4% in 2016, and thrifts cut expenses by 2.73%. Credit unions stayed the same. Banks are 16.3% less than credit unions in expenses and 14% less than thrifts. The difference is taxes, said Moebs.
“What if the new president eliminates taxes for community banks or banks less than $10 billion in assets?” said Moebs. “This would be done to stimulate small business lending, which would significantly increase jobs – a campaign theme of the new president. Credit unions and thrifts would be at a competitive disadvantage. Banks would be able to reduce loan rates by 50 BPs or more, and pay 50 BPs more for deposits than credit unions and thrifts. Is it time for credit unions and thrifts to cut expenses up to 20% or more?”
All Financial Institutions have seen service charges on deposits remain about the same in the past year, noted Moebs.
“Credit unions are at risk if service charges on deposit should decline since service charges represent 87.5% of net income for the entire credit union movement,” said Moebs.
Total fee income for all financial institutions is 141% of net income. Credit union total fee income is split between service charges on deposits, which is 48.8% of total fee income, with 51.2% coming mainly from loans. Banks have only 15.5% of total fee income from service charges, and the thrifts only 6.7%.
“Consumers can expect rising fee prices to increase net income to support growth in capital at banks and thrifts as a way to manage institutional risk, said Moebs.
With the total number of financial institutions in the United States falling under 12,000, management at banks, thrifts and CUs must sort out what is important for the future, said Moebs.
“The numbers show efficient use of people, branches and technology is a priority. A greater balance of fees, rates and deposit and loan balances is needed to reduce risk and increase productivity,” concluded Moebs. “The basic business of financial services is controlling expenses, staying competitive with rates, and knowing the bottom line comes from fees.”