MUSKEGO, Wis. –When it comes to managing the balance sheet in 2018, CUs will be focused on three key areas, according to QuantyPhi, adding that the CUs that perform best this year will be those that learned a critical lesson in the past.
QuantyPhi President Kevin Chiappetta emphasized that creating maximum earnings within a pre-set risk parameter is paramount among the balance sheet optimization service’s client credit unions.
“Setting appropriate benchmarks is key here,” said Chiappetta. “The information gained from benchmarking allows credit unions to determine how efficient their investment decision-making is relative to the amount of risk they are incurring. Benchmarking is an ongoing process in which credit unions continuously measure and adjust opportunity and risk in order to improve their overall financial health. It helps credit union leaders define and implement optimal strategies unique to their credit union’s performance goals and risk tolerance.”
Chiappetta said that benchmarking also makes it easier to identify investment decisions that lead, lag, or remain at par with other portfolio selections.
“In addition, it provides the basis by which credit unions can pinpoint key investment options, determine what types of investments will serve them best, and help clarify what level of risk to take on in order to build strong, resilient portfolios.”
Enhancing Performance
Chiappetta explained that CUs will be paying attention to capitalizing on opportunities to add assets that improve earnings without exceeding capital at risk limits, thereby enhancing overall balance sheet performance. “They will also be preparing for additional liquidity needs, potential member savings preference changes, and changes in loan demand.”
Chiappetta said these goals are similar to previous years.
“Since the end of the financial crisis in 2009, we have been told to prepare for rising interest rates that, as of today, simply haven’t happened,” he said. “Creating balance sheet strategies from a perspective of preparing for the long-promised rate increase has been a near decade-long exercise in frustration.”
Other front and center issues for 2018, he said, will include planning for potential rate increases, exploring strategies that perform well in multiple scenarios, and keeping sharp focus on overall balance sheet risk.
“Those credit unions able to invest in either in-house or outsourced balance sheet optimization technology and services will have an edge, as they will have access to up-to-the-minute market analyses and be able to run what-if scenarios that will help guide strategizing for fast-changing conditions,” explained Chiappetta.
Lessons From Past
In addition, those CUs that have learned a key lesson from the past will fare well in 2018.
“We believe that the primary lesson learned from the past is this: Credit unions willing to consistently reexamine their process and risk profile will be in a better position to perform,” said Chiappetta. “It does take time to review previous decisions, analyze the value of long-implemented processes and review long-held, but possibly outdated, beliefs regarding markets, operations, and investment philosophies—but dedication to studying history while embracing forward thinking is critical to success.”
The real threats to credit union business this year won’t come from competitors as much as from market issues, Chiappetta said.
“Market and regulatory issues will always have our constant attention—because as we see it, those issues, not competitors, are the biggest threats to the credit union industry’s survival,” he said. “Sharp market dislocations, such as rate movements, member demands for deposits, or changes in regulatory requirements, can have big impacts on performance. An often-overlooked threat may be easily considered ‘more of the same’ if we’re not vigilant.”
Chiappetta further observed, Papers, presentations, and experts warning us of the ‘inevitable rate increase’ have made us feel like rate hikes are threat number one. However, the long-term, low-rate environment has created as much of a challenge as any predicted rate increase we have been told to expect.”
Looking down the road, Chiappetta said that in five years QuantyPhi anticipates responding “the way we do today—with a focus on education and constant analysis. History will continue to guide us. Thoughtful, hard looks at the impact our decisions make on overall financial performance in multiple scenarios will help us better strategize for successful outcomes. Threats come in many colors, and the more we review how we respond to those threats, the better we will perform. Challenging what we believe to be true, asking why things work the way they work, and looking for a more comprehensive understanding of what we know, will ensure our future. Acknowledging that we don’t know what we don’t know is a giant first step in preparing ourselves for long-term success. Being ever-wary of getting it wrong will continually drive the question: Are we getting it right?”
QuantyPhi is a CUSO of Corporate Central CU.