Credit union CEOs, chief financial officers, and directors gathered in San Diego in August for an important annual event: CUNA’s Economics & Investments (E&I) Conference.
Prominent economists and investment professionals offered their take on current economic and investment conditions against a backdrop of imminently higher borrowing and lending costs given a looming increase in the federal-funds rate:
• The U.S. economy is on solid footing, with an improving job market, moderate inflation outlook, and increased demand for credit, said Bill Hampel, CUNA’s chief economist. Household finances have recovered, although debt outstanding is still relatively high.
While lower provision expenses and the end of stabilization assessments have been driving credit union earnings, risks surrounding debit interchange and overdraft revenues may hinder credit union earnings in the long-term.
Two other headwinds to watch: Excessive financial regulations and changes in the global economy, particularly Asia.
• Rising interest rates may take a toll. Net income will be affected as the Federal Reserve begins to normalize monetary policy, Hampel said, adding that mortgage refinance revenue already is declining significantly.
Although upward pressures on interest rates will be inevitable in the next few years, he underlined the need for flexibility due to marketplace uncertainties—such as recent developments in China—and the still murky path of interest rate increases.
Other E&I Conference insights:
• Asset quality is improving due to the combination of a declining unemployment rate and fast loan growth. NCUA has concerns about credit unions’ interest rate risk exposure, however, especially among a small number of institutions that appeared to greatly increase holdings of longer-term assets over the cycle.
• Credit unions should have access to secondary capital. In the past, regulators viewed capital mostly as a tool to help ensure survival during tough times.
This view changed due to the Great Recession. the new view is the idea of “going concern” capital—maintaining sufficient capital after losses to not simply survive but to continue normal operations.
This is where supplemental capital comes in, such as options that are similar to bonds, preferred stocks, and contingent convertible securities.
• Credit unions should budget for increased compliance costs. Increasing regulation may reduce fee income, and it will require more and better-trained staff—a costly prospect.
• Technology—such as Google Wallet and Facebook’s peer-to-peer payments feature—poses new challenges on credit union payments and operations. In response, credit unions need to embrace some of these technological innovations to prevent disruption.
• Key financial challenges include growing loans, boosting net income, increasing net interest margins without creating undue risk, and maintaining a laser focus on efficiency.
• Credit unions need to connect with members of the millennial generation (generation Y) and do all they can to obtain their mortgage business.
While nobody knows for certain what the future holds, look to the 2016 E&I Conference for in-depth economic analysis and the impact on your credit union.
And visit cuna.org/economics for ongoing insights.
PERC PINEDA is CUNA's senior economist.