Trade concerns underpinned a volatile August, and markets remain sensitive to trade tensions between the United States and China. Even if a comprehensive trade deal is reached in the near term, economists are unsure whether it will be too late for the global economy to avoid recession.
The state of the global economy is a key consideration for credit union financial managers who are planning for 2020. It also provided a colorful backdrop for the financial executives, board members, and leaders from credit unions across the country who descended on San Antonio late last month for the ALM First Financial Forum. Attendees mingled and networked as they uncovered insights, formulated strategies, and gained new perspectives about the coming year.
For credit unions that couldn’t make it, read on for the top takeaways from the three-day event.
No. 1: Avoid Speculation, Embrace Opportunity
It’s a time of mixed economic readings with low unemployment, strong payroll growth, and solid consumption in the United States seemingly at odds with fledgling trade wars and manufacturing slowdowns on the global stage.
Still, credit unions should avoid speculation and reactionary decisions, advised Jason Haley, managing director at ALM First’s Investment Management Group.
Haley noted several opportunities for credit unions in the coming months. He expects mortgage originations to increase, which will present an opportunity for credit unions to use excess capital to leverage current mortgage production on a hedged basis at historically wide, risk-adjusted spreads. As the chart below shows, the spread between 30-year mortgages and 10-year swap rates is at its widest level since 2015. Even with overall mortgage rates still at historic lows, institutions with the ability to hedge their interest rate risk would do well to increase their mortgage originations.
The spread between 30-year mortgages and 10-year swap rates is at its widest level since 2015.
Downward pressure on net interest margins and deposit franchise values will make risk management more critical as it relates to asset pricing, funding mix, and liquidity management, Haley says. He advices credit unions to focus on non‐interest items — such as fees and efficiency ratios — as they look for ways to maintain profitability while delivering value in the coming year.
No. 2: Consider Different Funding Sources
On The Panel
Greg Gibson, CFO, Georgia's Own Credit Union ($2.5B, Atlanta, GA)
Gary Nichols, VP of ALM, First Tech Federal Credit Union ($12.6B, San Jose, CA)
Nick Ambrosini, EVP/CFO, Kern Schools Federal Credit Union ($1.7B, Bakersfield, CA)
Nathan Montgomery, CFO, Unify Financial Federal Credit Union ($3.0B, Torrance, CA)
As balance sheet managers plan for the coming year, deposit strategies remain a hot topic. Conference attendees took a deep dive into deposit strategies during a panel discussion with topics that ranged from wholesale funding to bank acquisitions, niche relationships to Equifax data.
The percentage of total deposits in money market accounts has grown at many credit unions, making it more challenging to move rates without significantly impacting the net interest margin. Panelists discussed wholesale funding, including borrowings and non-member deposits, as one potential solution. According to them, it can be an efficient funding tool with costs that are easier to control than member deposits.
The panelists also discussed developing or maintaining niche relationships as another option to raise deposits. This strategy can attract high net worth individuals, such as private banking groups.
Lastly, the panelists discussed how some credit unions are testing the use of Equifax data to determine at what other financial institutions members hold deposits. Much like the popular loan recapture programs credit unions have run for many years, this new deposit data could create opportunities to recapture shares.
No. 3: Take The Long View On Profitability
The movement of interest rates currently dominates economic headlines in the United States, but presenters at the ALM First Financial Forum advised attendees to remove interest rate predictions from their discussions.
When it comes to sound and sustainable balance sheet management, don’t place bets on which way rates will move. The panelists cited this year — with expectations shifting from rising rates to falling — as a classic example of how moods swing. Instead, panelists suggested financial executives focus on spread management and appropriate risk pricing.
No. 4: Keep An Eye On Fintech And Disruptive Digital Technologies
Former banking executive and entrepreneur Scarlett Sieber provided examples of organizations that are excelling in today’s challenging new landscape, and several credit unions shared their own experiences with fintech partnerships — such as CU Payz, a new CUSO that enables users to deliver the Payrailz payments experience — highlighting the ongoing opportunities for cooperatives in this space.
The field of financial services is undergoing a strategic transformation with a drive‐for‐scale and investments in innovation creating competitive advantage. Mark Sievewright, founder of Sievewright & Associates, discussed how the definition of scale is changing and how depositories should respond to transformations in business models, technology, new entrants and demographic shifts.
Finally, Guillermo Kopp, a director at Microsoft, discussed breakthrough innovations such as artificial intelligence and open cloud computing. He gave specific examples, such as incorporating virtual reality and advanced biometrics in branch and interactive teller machine design, of how credit unions may tap emerging technologies and services to improve the agility, insight, speed, and value of member interactions.
ALM First Financial Advisors, LLC, is the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com. Callahan Financial Services, distributor of the Trust for Credit Unions Portfolios, is a wholly owned subsidiary of Callahan & Associates.