Graph of the Week: Low Investment Yields Puts Spotlight on Need for Loans


At September 2009, the credit union industry reported the largest gap between average yield on investments and loan yields since 2004. Last week during Callahan’s 3Q Trendwatch webinar, Patrick O’Callaghan, vice president at Goldman Sachs Asset Management reported an economic outlook of historically low fed funds rates through 2011  – 12 months longer that its earlier forecast. The webinar featured speakers from Callahan & Associates and Goldman Sachs, and examined credit unions’ performance, provided an outlook for the future and discussed growth opportunities for the industry.

As investment yields remain low, credit unions need to focus on boosting earnings through higher earning assets—notably, loans. The Card Act presents an opportunity for credit unions to grow card balances at the expense of other financial institutions. And data from third quarter shows credit unions’ are doing just that. Outstanding credit card loans reached $33.8 billion and unused credit card lines hit $74.4 billion, while lines at FDIC-insured institutions fell by $1 trillion over the past 12 months.

Kevin Marvel, Marketing Director from APL Federal Credit Union (Laurel, MD), participated in the Webinar, sharing his organization’s success story with a basic credit card product. By offering a simple card, with no fees attached and the same, low interest rate of 7.5 percent to everyone, APL FCU saw its card program grow by three times – both in new accounts opened and outstanding balances. And Marvel used the Credit Card Act as a communication opportunity to show members why APL’s card was better.

To view the full presentation of Goldman’s economic outlook and an overview of credit union financial performance as of 3Q 2009, visit Callahan’s Trendwatch recording page on CUtv. Throughout the call, a recurring theme centered on the resilience and stability of the credit union system during our nation’s worst economic downturn since the Great Depression. Credit unions continue to benefit from consumers’ confidence in them and are seeing growth in many areas.




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.