Debt Reduction May Provide Higher Return Now
Even as credit unions continue to manage deposit yields, for many consumers, some concerns are more pressing, such as reducing debt.
From a household balance sheet and cash flow perspective, debt reduction provides a significantly higher return, according to the November Credit Union Trends Report from CUNA Mutual Group. However, from a credit union perspective, deposit yields continue to be managed lower.
"The lack of loan demand implies new deposit inflows must go into investments. The combination of assessments on deposits and short-term investment yields below the average cost of funds translates into negative spreads on most new money," wrote Dave Colby, chief economist at CUNA Mutual.
Given the low rate environment, members can choose liquidity without sacrificing significant yield, Colby noted. Approximately 120% of deposit growth over the past year is attributable to share drafts, regular shares and money market accounts, according to the report. Current national average yields on these accounts are 0.37%, 0.41% and 0.70%, respectively.
Colby said going forward, credit unions can expect stronger deposit growth by year-end primarily due to payroll timing. Savings and asset growth are forecast to slow in 2011 due to the low interest rate environment, credit unions will continue to closely manage growth to protect key ratios and a slight economic improvement late in the year.
"While the probability of a double-dip recession has edged down, no environmental lift is forecast for the next 12 to 18 months," Colby wrote. "Thus, credit unions must be more aggressive in finding solutions to members' financial challenges. To improve the bottom line and help replenish capital, credit unions will need to add more well managed risks to their balance sheets in the form of member loans."