By Ray Birch
LOMBARD, Ill.—Credit unions could face significant core deposit runoff once interest rates begin to rise, experts are warning.
Indeed, one person is cautioning, “We will see more competition for deposits next year than we have seen in the last six to seven years.”
Analysts, concerned about hot money hiding in core funds and expecting deposit rates to increase mid-2015, are recommending that as the new year approaches credit unions start examining deposits closely to detect volatility and devise strategies to prevent money from leaving (see related stories).
All of that, however, depends to some degree on how much rates will move following a hike in interest rates by the Federal Reserve, what sources agree will trigger widespread rate increases.
One economist, too, told CUToday.info that any credit union using history as a barometer—such as 2004 to 2006 when there was a consistent, steady rise in rates—for how quickly and how much money could move, it should factor in the fact that mobile banking makes it much it easier today to move deposits.
Despite the end of the Fed’s policy of quantitative easing coming at the same time loan demand has grown more robust—possibly driving up liquidity needs--most experts see financial institutions holding steady on deposit rates for now.
Bill Handel, VP of research at Raddon Financial Group, acknowledged that rising loan demand has produced signs of liquidity pressure among a limited number of FIs. That, coupled with the Fed “losing some control” over where interest rates are headed, could move deposit rates abruptly next year, he said.
“When interest rates begin to move, they may move rapidly. We will see more competition for deposits next year than we have seen in the last six to seven years,” said Handel. “It is smart for organizations now to think about deposit strategies—are we in a retention or acquisition mode? Maybe we are still willing to let deposits continue to run out the door. But I think most are moving into an acquisition mode.”
Rates Rise Mid-2014
Analysts see an economy that has yet to show real strength, particularly around jobs, doing little to jump-start stagnant, rock-bottom rates.
Michael Moebs, Moebs $ervices
“And we are seeing the Federal funds futures market, where people have skin in the game, indicating they think the Federal Reserve will not make a move until July,” noted Mike Schenk, CUNA’s VP of economics and statistics.
Michael Moebs, economist and CEO at Moebs $ervices in Lake Forest, Ill., said credit unions and banks are both now in “hold mode” because of the election and the end of quantitative easing.
“CUs like everyone else are waiting on the Fed. Moves are based on monetary policy and regulators. The Fed is in a difficult position since QE has shored up the shortfall of $3-trillion in money supply, but has bloated the Fed’s balance sheet. Ninety percent of QE has gone into credit union and bank reserves. Regulators still have the brakes on, with conservative lending, and wanting more than 10% in capital.”
Looking at a sample of credit union data through Sept. 30, Bill McGuire, chairman emeritus at McGuire Perfomance Solutions, a Mountain View Company, Scottsdale, Ariz., sees only minimal growth in deposit balances and minimal changes in deposit rates.
“There is no evidence of repricing on the core deposit side,” said McGuire, who predicted rates will increase slowly when they rise. “That observation includes a lot of premium rate MMDA-type categories and some CDs, which tells me there is no quickening of competition even for first-to-reprice deposit types. Considering the pressure net interest margins and earnings have been under for a long time—and the knock on effects for capital—that is no surprise to me. I expect that same kind of repricing discipline to hold even when interest rates initially rise—credit unions have a lot of earnings and capital growth to catch up on.”
The theory that loan demand is driving up liquidity needs among many financial institutions is not accurate, explained Schenk, who said most of the loan growth showing up in financial services industry statistics is from big banks and very large CUs.
“Loan demand is quite strong, but dig into the data and you see it’s really strongest in the nation’s largest institutions,” said Schenk. “If we look at overall loan-to-share numbers at credit unions they are still coming in mid-year at 72%. That is a little bit higher than the cyclical low in 2011 of 69%, but substantially lower than the pre-recession high of over 80%.”
The growth CUs should pay close attention to now, insist several experts, are bulging core deposit dollars. Moebs contends that a great deal of hot money is hiding in core deposits, and that CUs that want to keep these funds need to be ready to move when rates rise and the MMDA accounts boost rates.
“Let’s look at the facts,” said Moebs. “Retail CDs are down 60% from the fall of 2008. Shares and money market deposit accounts are up 82%. Checking is up 144%. Is this normal? I don’t think so.”
Handel said “surge balances,” highly rate-sensitive money, are hiding among stable core deposits. “Maybe 5% to 10% of your deposit base could be surge balances—which means when rates move these funds may become more active than what your ALM model suggests.”
Banks Hold More Hot Money
But two experts think that banks hold a much higher percentage of hot money in core deposits than credit unions.
Curt Long, NAFCU
Curt Long, NAFCU’s chief economist and director of research, and McGuire contend the strong savings and checking growth among credit unions is due largely to new members coming aboard after being dissatisfied with banks, and not as much from consumers parking hot money.
McGuire pointed to the Lehman Brothers crash in 2008 and all the money that immediately moved out of the stock market. He agreed that was hot money and said credit unions should work to identify those funds. “That is money to be concerned about.”
“But if you take a straight line and draw it from 2008 to 20014, a boatload of credit unions just kept on growing,” said McGuire. “This represents the expansion of the credit union franchise at the expense of banks. You’ll want to watch core deposits. But I am of the opinion there are a lot of credit union core deposits that are rate insensitive.”
Long, too, cited record CU membership growth leading to expanding CU checking and savings coffers.
“These members aren’t especially rate sensitive,” contended Long, saying the bank converts flocked to CUs for lower fees and better service—not rate. “As rates rise credit unions may not experience the kinds of deposit or account loss as banks.”
But as credit unions test their ALM models, and look at deposit trends from the last time rates moved significantly—2004 to 2006—they must factor in how mobile could possibly increase money movement today.
“There was more friction the last time a lot of money moved,” observed Long. “If you were not getting the right rate from your credit union, you had to stand in line at another financial institution. Now you can just pick up your phone.”
Tomorrow: Gauge Member Sensitivity To Rate Movement