Guest Opinion: Top Credit Unions Are Held Back by Industry’s Shortcomings
A new analysis by Sandler O’Neill underscores how critical the sheer size of financial institutions has become to their surviving and thriving. Yet top performing credit unions are being held back by a systemic lack of accountability.
Consumers have aggressively shopped for the best rate on loans and deposits, triggering a 20-year decline in the net interest margin of banks and credit unions. Further challenging profitability is the need to continually invest in technology, both to increase customer convenience and to protect against fraud. Added to that are the increased compliance costs and pressures on fee income arising from the Dodd-Frank Act.
Over time, the impact on income and competitiveness will be felt as stronger banks merge meaningful assets and improve their efficiency ratios, while stronger credit unions cannot. Stronger banks of all sizes acquire weaker banks, sometimes with FDIC assistance, which has led to only 10% of the industry’s assets residing in banks smaller than $1 billion. Further compounding the issue is the relative size of the merged institutions. Sandler O’Neill research derived from NCUA and FDIC data reveal the average credit union merged since 2004 has $19 million in assets, compared to $749 million for banks.
Average and weak credit unions are not merging. To maintain market relevance, many are pricing their products and fees in a manner that not only produces a negative ROA, it erodes their capital. In addition, such loss-leader pricing harms healthier institutions by creating customer expectations of similar pricing from them. When resolution of a weak credit union finally occurs, there is little left to attract suitors.