Credit Unions: Stick to Your Bases and Play Ball!
Well, baseball season is here, America’s favorite past time, and the season is unpredictable as ever. My San Francisco Giants won the World Series for the first time in my life a couple years ago, and we missed the playoffs by a few games last year, and we started the season this year with the first three games resulting in losses. Not to be cliché, but past performance cannot predict future results.
However, if you’re in finance, you have very little to go on these days. Ben Bernanke has promised us low rates until late 2014, which is the equivalent of betting on the Dodgers to win the whole thing this year (yea, right!). Economists are looking very close at Ben these days, looking for any clue of what the next pitch is going to be, a curve or a fastball, or the dreaded pitchout. The NCUA has recommended that we shock our balance sheets at 400 and 500 basis points because the rates are so low. Four years ago we thought 300 basis points were too much!
The economy has traded loans growth for share growth, and we didn’t even get a say. Members are paying down debt, strategically defaulting, just regular defaulting, and not borrowing like they used to. Our general manager, the NCUA, is trying to recruit the heavy hitter, Mr. MBL. However, the little credit unions have little or no expertise in this area. So while raising the MBL cap may help some of us, it’s not the all-star the industry needs.
The housing market is still at record lows, each month that shows a gain is followed by a month with losses. While selling mortgages to the secondary market is a smart interest rate sensitivity move, we trade high yielding loans for low yielding investments.
The question we have to ask ourselves is, can our company handle 10%-15% of our loan portfolio at 4% for 15 years? Credit unions routinely do not have a large variable loan portfolio, which has made the NCUA nervous recently. While we have lived with the possibility of raising rates over the past several years, it has not materialized.
And Ben has promised us low rates until 2014. So having low rates would be acceptable these days, however, only for those loan products that have a weighted average maturity of less than four years. This leaves us with our fastball, our bread and butter, the auto market.
The competition is tough in the auto market with 0% financing, no payment for 90 days, no credit needed, etc., but, I think credit unions can still make loans, make relationships, and drive income.
There are CEOs that would disagree with offering a 1% new auto rate, or a 2% used auto rate, and maybe they are right. If an investment at three years yields 0.80%, add 0.20% for the loan loss allowance for each new dollar in this category, this gives you a 1% yield. Now, if you have a 20% success rate at adding GAP insurance, and 10% success rate of MBI, this would yield 1.20%. Not to mention if 30% of each new member uses your debit card, credit card, and overdrafts once in a while. Depending on usage, each new loan could now yield you 1.50%. Still too low? Make it a 2% new auto loan, which could yield you a 2.50%.
I recently overheard a conversation two CEOs were having. Both were talking about how low their rates were for new autos, both were over 3% and not having any luck. They decided not to play ball with the big guys. But sitting on the bench and waiting for the game to change is not an option that’s going to get us the win. We must get back to what we do best: low fees and great service. Building member relationships, being top of wallet, increasing our non-interest income, is what’s going to get us to the final innings and keep us in the game.
The season is just beginning, nothing that happened yesterday, or last year, is going to help us predict what’s going to happen this year. We must keep a watchful eye on rates, the housing market, the job market, and our members’ behavior.
Although, we have several pitches to throw, we need to rely on what we know and do the best, whether that’s MBLs, autos, mortgages or Visas. We must take what we do best, and make it better and more appealing than what is in the market place today. Adding special features, reducing the prices, letting the member feel like they are getting a deal, will bring us the home runs we need.
Good luck this season, and Play Ball!!