By Ray Birch
DALLAS—Getting proper pricing in place has never been more “critical” as credit unions look for strategies to respond to balance sheet and liquidity pressures, according to ALM First, adding part of the response has been a particular focus on certificate pricing.
A key concern for many CUs: Loans have been underpriced for too long in a rising rate environment and they now face either having to sell investments at undervalued prices to fill revenue gaps while at the same time facing a decision on raising deposit rates to levels they can’t afford in order to stem any outflows, the company added.
“There's a there's a lot to unpack when you think about how balance sheets have evolved over the last 18 months,” Travis Goodman, principal at ALM First, told CUToday.info. “As we started going into a rising-rate environment we wrote an article (in 2022) about how the failure of many credit unions to reprice their loan rates was going to cause liquidity issues. And we are seeing some of that now. I think what's occurred is that credit unions were very slow to raise loan rates last year and thought all of the good loan volume that they were getting was purely beneficial.”
But the reality, explained Goodman, is that volume was due to mispriced assets.
“And that was causing a liquidity drain that they are now having to pay for,” said Goodman. “If you take all of your resources and deploy them into a kind of a less-profitable environment and now you have a depositor who wants a higher rate, you're very much going to be dealing with this scenario where your margins are going to compress.”
ALM First’s perspective comes at a time when savers stand to get the highest returns on their deposits that they’ve seen in 15 years. As CUToday..info reported, top-yielding online savings account rates are now just north of 5%, the highest since 2008, and much higher than last year’s 0.8%.
It Looked Like a Good Idea
Goodman said what may have blinded many CU CFOs and ALCOs to the growing problem is the strategy of keeping loan rates at rock-bottom levels looked pretty good last year.
“Yes, you had good loan volume. But you're moving balances from investments into the loan portfolio this year. You're being forced to pay more for it. And that's causing the kind of second-order effect of decreasing margins and greater liquidity pressures as liquidity has gotten tighter,” he said. “It's put more and more pressure on that deposit rate.”
Credit unions in many cases are being forced to either sell investments at losses or price themselves out of the market on lending to slow down lending volume, according to Goodman.
“Both of those things have been detrimental. Ultimately, the biggest issue of all of this is that credit unions were too slow to raise rates to begin with,” he said.
CUToday.info reported this issue with CU auto loans earlier this year.
What’s the Plan?
What should CUs be doing?
“I think right now is a very critical time to make sure both assets and liabilities are priced correctly,” Goodman said. “You’ve got a scenario where you've been told for 15 months that you need to make changes. And there are still credit unions that are not high enough on their loan rates, and they're going to put themselves into some really difficult trouble. There's going to be increased pressure on margins as a result of this liquidity issue and we should expect that. We should be planning for that now.”
Where CUs are Raising Rates
Among ALM First clients, Goodman said the company is seeing credit unions that want to be competitive on deposits focusing on certificates.
Travis Goodman
“So, I'm not going to reprice my entire sticky transactional accounts that much, as that might have a much higher marginal cost,” he said. “If I would have raised rates, for example, on a checking or savings or money market account and I only grew deposits by 5%, then I’d have a very high marginal cost. That means it's very expensive new money.”
That is causing many institutions, not just credit unions, to focus on CDs. As CUToday.info has reported, numerous institutions are promoting certificates online with rates above 5%.
“Many institutions are looking at CDs as an alternative way to offer higher deposit rates without that really high marginal cost,” he explained.
A New Environment for Many
Goodman emphasized the current rising-rate environment is new to many CFOs.
“Look at the last 15 or 20 years, there’s been very few scenarios where rates were prolonged at an elevated level,” he said. “This is one of the most recent times, obviously, where rates have increased and didn't fall soon thereafter.”
Goodman added that some credit union pricing experts may have simply been caught off guard by all the fierce competition for deposits that has suddenly emerged in the market.
“Competition for deposits are much higher now and, therefore, offering a higher rate is required,” said Goodman. “You're seeing credit unions, and even banks, being forced to offer higher rates to keep up with this higher-rate environment.”
An ‘Isolated Issue’
Goodman agreed there has been some fear in the market that smaller financial institutions, particularly banks, could lose funds to larger banks as a result of safety and soundness concerns following the failure of several banks, but he believes the issue is isolated.
“I think safety is a very big issue for uninsured depositors,” he said. “When you look at Silicon Valley Bank, for example, 90% of their deposits were uninsured, meaning above the $250,000 threshold. If you look at credit unions, I think the average credit has about 10% uninsured deposits. They have a very different makeup, from that perspective. We've actually seen many credit unions actually growing deposits as people are moving from what they may consider unsafe banks into back into credit unions. And as far as that 10% figure, that is because credit unions are retail based, as opposed to commercially based.”