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Economic Up Tempo May Prompt Rate Ratchet
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Peer Group Comparison: Short-Term Credit Products
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Neither snow nor rain nor heat nor gloom of night...
Changing When Change is Hard
Dec. 7, 2009
While the author’s conclusions are easy to understand, he misses some rather crucial points. First, the yield curve is very steep. Ten year Treasury notes are 270 basis points above two year Treasuries. Much of the fact that Loan yields are higher reflects the term differential between loans and investments. The average term of most credit union's investment portfolios is less than 2 years. Yet the average credit union has over 30 percent of their loan portfolio in first mortgages which yield well over 5.5 percent. This yield curve is far steeper than usual. When it does move back to average, via higher rates, all those first mortgage loans are going to drop a lot in value in value and many CUs will find themselves struggling to grow because they won't have the earnings to pay higher rates on member deposits. Second, credit spreads are wider. And, they should be. The losses many credit unions are realizing are the result of over aggressive credit policies. Proper loan pricing takes into account the cost to originate, service and the likely amount of losses over the economic cycle. Those credit unions that had SUV owners throwing keys at them 18 months ago have not forgotten the experience and they are mindful that the price of oil could easily double again. Third, economic risk is still very high and government is adding to it. Just witness the EPA's unilateral decision to abrogate congresses right to declare carbon dioxide a hazard. Don't think for a moment that that decision won't have an impact on jobs. Finally, economists have awful record of forecasting interest rates. It is much better to model the outcomes rather than bet that any one economist gets their interest rate forecast right. Unless APL is offering 7.50% as a variable rate, they are going to find their earnings squeezed as interest rates return to normal levels because they will not be able to increase the rate on existing balances. In addition, even if the 7.50% rate is a floating rate, APL is going to find out about adverse selection. Their 7.50% rate will be most attractive to those members who have not managed their credit effectively in the past. When interest rates return to normal, these members will be least able to handle the increased cost of their outstanding balances. The credit union industry needs articles that are better thought out, not just reflective of the surface clutter.
Economic Up Tempo May Prompt Rate Ratche...
Industry Performance (3Q 2015)
Peer Group Comparison: Short-Term Credit...