Credit unions and banks are enjoying some of the most profitable times they’ve seen in a decade but need to keep an eye on moving interest rates, according to Jason Haley, managing director of ALM First’s Investment Management Group.
Haley shared his insight on the opening day this week of the 2018 ALM First Financial Forum at the Hotel Del Coronado in San Diego, CA, using his firm’s research on past economic environments to help attendees decide how to respond to changes.
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Deposit betas, how sensitive a financial institution’s deposit pricing is relative to the market, were just under 20% for all FDIC-insured commercial banks as of the first quarter of 2018. However, Haley says, there are wide ranges between individual banks, with some at less than 5% and other institutions at over 30% in certain regional markets. While not many financial institutions are re-pricing yet, there is a lot of talk about when the big banks may reprice and what impact that will have on other depositories.
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With the yield curve flattening, which Haley says is typical during Fed policy normalization, some have expressed concern that the curve is on its way to inverting. An inverted yield curve is a predictor of an impending recession based on past cycles and soft landings, with no inverted yield curve after normalization being rare. Despite headline noise, Haley believes the Fed will continue with gradual normalization over the next six to 12 months if the current data trend holds. Whether the Fed may decide to pause rate hikes in 2019 is still a question along with how LIBOR reform will evolve and how the 2018 elections may impact regulatory reform.
Meanwhile during a panel discussion on regulatory updates, Simone Lagomarsino, president and CEO of the Western Bankers Association, shared that state regulators overseeing both banks and credit unions have asset liability management on their radar and are questioning how depositors will behave as rates continue to rise. She suggested financial institutions consider:
- Liquidity management
- Reviewing their assumptions
- Contingency funding plans
Lucy Ito, president and CEO of NASCUS, discussed ensuring the dual charter system remains robust along with supplemental capital and adopting a separate assessment (CAMELS vs. CAMEL) to measure sensitivity to market risk. Meanwhile, panelist Jason Scott, vice president of performance and planning analytics at Security Service Federal Credit Union ($9.5B, San Antonio, TX), discussed net interest margin (NIM) compression, liquidity, and the importance of managing deposits and deposit duration. The panelists agreed that ongoing dialogue with regulators is important to building relationships and learning about best practices that other financial institutions are implementing to tackle similar challenges.
During the final session on the first day of the 2018 ALM First Financial Forum, panelists shared current trends and the impacts from each of their depository perspectives. Todd Lane, president and CEO of California Coast Credit Union ($2.5B, San Diego, CA), discussed the importance of digital channel development to meet growing member expectations along with his credit union’s overall focus on efficiency, visibility, and growth.
Joan Opp, president and CEO of Stanford Federal Credit Union ($2.5B, Palo Alto, CA) discussed her credit union’s high growth trajectory over the past several years and why she’s focusing on both member engagement and deposits, along with the digital channel.
Also Read: No One Way To Manage A Balance Sheet. No Such Thing As A Bad Loan.