By Ray Birch
LOMBARD, Ill.—In the midst of a forecast for the remainder of 2020 that calls for more pressure on credit union margins for several reasons, one expert is pointing to another piece of data he calls “fascinating.”
“This is the longest expansion in history, and all expansions just get tired,” said Handel, SVP of research at Raddon. “We're thinking about the impact that's actually going to have on the industry.”
The pressure is coming at the same time the credit unions industry’s operating efficiency ratio is lower than it has been in 10 years. Handel called that a “fascinating” point.
“When we were beginning to move toward the expansion about 10 years ago, our efficiency ratio was better than it is today,” said Handel, noting at that time the ratio was 72%. Today it is 77%. Raddon data further show banks have improved efficiency over that period, going from 88% to 70%. “We are worse today than we were 10 years ago and I think a lot of people would find that surprising—we’ve gained so much in loan demand, the industry is healthy…”
What’s Going On?
So what’s going on? According to Handel, credit unions now find themselves in a much more competitive marketplace than a decade ago.
“Not only with the big banks, but non-traditional financial services players, as we all know,” said Handel. “This is our reality.”
The confluence of trends requires credit unions to pay close attention to their business models in 2020, suggested Handel.
“It means not going into excess in any areas,” he explained. “It’s about managing risk appropriately, including the terms and types of lending you're doing. I think there's going to be more institutions reaching a little bit deeper into the credit risk pool, because of the additional pressures I have mentioned. I think many institutions have been feeling pressure on earnings and I think that number may grow this year.”
Proceed With Caution
One area in which credit unions are likely to increasingly look to more indirect auto lending, Handel believes. In those cases he urges CUs to move forward very carefully, especially as dealers are “asking for a lot now.”
For example, CUToday.info has received a report that Wells Fargo is significantly stepping up the flat fee it pays dealers—to a whopping 5%.
“Proceed with caution here,” warned Handel. “You really have to understand this business or you should not be in it. This is going to become an even more competitive business area this year, and profitability will be impacted.”
Bill Handel
Handel, before the Federal Reserve cut rates 50 basis points in early March to address coronavirus’ threat to the economy, predicted the Fed, in a softer economy this year, would lower rates again.
“That will put more pressure on margins and therefore earnings,” he said. “But this is what happens in an economic cycle and credit unions should prepare for changes now because you’ll be better off as an organization and make it through 2020 in a little better place.”
Planning for Gen Z
Planning should also include how credit unions will address Gen Z, not just Millennials, added Handel.
“This is a longer-term matter,” he said. “I think many people think Gen Z and Millennials are much the same, but they are different. I think we're going to as an industry make a concerted effort on Gen Z as we have on Millennials. I think the industry needs to figure out how to get ahead of the Gen Z issue. Find out how to pull them in, in a cost-effective manner…It's about how do we build relevancy—both with Millennials and Gen Z groups that are very driven by purpose or cause. I think Gen Z may be more purpose and cause driven than any previous generation, and I think that fits well with the credit union business model. We just have to make sure we're paying attention to this group.”
For more predictions from Handel, go here.