By Ray Birch
ATLANTA—CFOs inexperienced in managing through a rising rate environment could make the kind of mistakes that are the differences between growing and being forced to merge, according to one expert.
After a decade of either declining or flat rates, rates on savings and loans have both ticked up this year. Initially, when CUToday.info launched this series, the increases were being driven by a slow, methodical process by the Fed to push up the Fed funds rate. That effort has since stalled, but rates are now being pushed up by a competition for deposits.
What all that means is a new environment for many chief financial officers.
“It’s been a very long time since credit unions saw a rising rate environment before the one we have recently experienced,” said CU Capital Market Solutions CEO Lewis Lester. “In fact, it’s been so long a lot of the CFOs who were working in credit unions back then have since retired. We’re seeing a new generation of credit union CFOs come to us for advice on how to manage a balance sheet in a rising rate environment, because they’ve never experienced it. A rising rate environment requires a very different strategy, and mistakes made today could limit credit union income significantly and potentially mean the difference between growth and being merged.”
You Can Read About It, But…
Lester pointed out that the U.S. recently experienced almost 12 years of flat or declining rates.
“People within the industry who know how manage through a rising-rate environment, there’s not that many of them,” said Lester. “You can read about how to manage through rising rates, but unless you've actually done it before…it's something that can be confusing at times, even to those who have been through one such cycle.”
Robert Colvin, CMS president and chief strategist, emphasized every financial institution won’t make the same moves as rates rise.
“Every institution has its own needs, and every balance sheet manager has their own ways of doing things,” Colvin said. “So you get into a rising-rate environment, and say your strategy from the investments side has been a five-year ladder. Do you ride the five-year ladder out, or do you reposition your portfolio? If you're going to reposition your portfolio, the commissions you’ll pay, on paper, will kill the yield. So you may not be able to reposition that portfolio.”
Colvin said CFOs also must be prepared for an end to easy money as rates rise and members are enticed by higher-yielding vehicles outside traditional CU offerings.
“The number-one issue in a rising rate environment is it's more difficult to raise deposits, and CFOs need to be aware of that,” said Colvin. “Core deposits are great, except they can walk out the door tomorrow. And I think people are starting to feel the pressure of having so much of that.”
Another Concern
Colvin is also concerned about how new entrants in the marketplace may impact credit union deposits.
“As we know, Apple has announced they are coming out with a new credit card with new features, so how much money is that going to take away from credit unions—we don't know,” said Colvin. “And it’s not just Apple to be concerned about, but other new players in the financial services space, like Amazon. They keep chipping away at credit unions’ loan funding base.”
The best strategy for CFOs now is to get flexible, the analyst said.
“I would say when rates were starting to rise, people were concerned about the impact on their balance sheets. Now the Fed has taken an about-face and we are looking at potentially going in the other direction with rates,” said Colvin. “So, now what do I do, and how can I take advantage of this situation? With a 10-year T-Bill now down to 2.4% (as of May 17), there's a lot of people who would like to put long-term money on the balance sheet; however, they could not sell a five-year CD regardless of the rate they put on it. CDs have kind of gone by the wayside, so how do you make long asset commitments if everybody wants their money overnight. You have to have another way to try to manage that interest rate risk.”
The Wholesale Market
Colvin suggested the wholesale market gives CFOs flexibility and agility.
As CUToday.info reported, CU Capital Market Solutions has finalized a deal with Fidelity Capital Markets that allows CMS client credit unions to execute security transactions directly with Fidelity. Previously, the ability to trade directly with Fidelity was only available to credit unions with several-billion dollars in assets, Lester said.
“This is a huge win for credit unions,” said Lester. “Not only do they gain superior market execution with Fidelity, but they receive market pricing without markup/markdown or commissions, so credit unions will receive wholesale pricing, resulting in a higher overall portfolio yield.”
According to the company, the agreement provides access to the Fidelity Capital Markets Institutional Trading desk to CMS client credit unions without paying a commission on each trade. Instead, credit unions will pay an annual advisory fee to CMS.
“Since the trade does not include a markup/markdown or commission, investment yields on the balance sheet will improve immediately,” Lester said.
“We are trying to give credit union CFOs tools to more easily manage their balance sheets, which is especially needed in today’s now unpredictable rate environment,” said Colvin.