ORLANDO – Credit union bottom lines may see more tightening as short-term interest rates rise requiring some of them to reshape their asset/liability portfolios, one expert told attendees at the recent Annual Convention & Exposition of the Florida Credit Union League.
Jared Cahill, national director, alliances, at John M. Floyd & Associates, shared tips on responding to tightening profit margins. He also discussed recent negative trends such as a decline in asset and liability pricing and stiffer competition. Citing CUNA's Center for Research & Advice 2005-2006 E-scan statistics, he noted a need for greater emphasis on fee income, sharing specific suggestions for improving non-interest income. Credit unions might also want to improve productivity, optimize cost of human capital, to reduce costs of new product launches and reduce full-time equivalent expenses, he suggested.
"Margins are getting tighter; asset and liability pricing elasticity is declining and competition is getting stiffer," Cahill said. "As short-term interest rates rise, credit union bottom lines will be squeezed ever more tightly, requiring some of them to reshape their asset/liability portfolios, to boost non-interest revenue and to invest in developing a sales and service culture that better markets and cross-sells products and services to their members and potential members." Cahill suggested that credit union executives should be "less concerned about peers and more anxious about competitors. And consolidations and mergers are only driving up the ante." "To survive and thrive, credit unions must increase non-interest income, lower operating costs, grow and be competitive," he emphasized. Surprisingly, E-scan reported only about 69% of credit union CEOs surveyed rank "increasing fee income" as "critical" or "very important," he pointed out.
Recommended For You
Cahill advised a concerted effort to increase non-interest income by enhancing fee income, such as an overdraft privilege program and instead seek product income from such sources as credit disability insurance and credit life insurance. Other strategies included preventing overall "performance leaks" by lowering fee waivers and charge-offs, adding new products and services, and increasing income by cross selling more products to every member encountered.
"A project to increase non-interest income will bring the quickest value," Cahill said. "Studies show it is faster than account acquisition, sales and service or expense reduction projects. Credit unions, which have grown capacity at about 15% a year while growing only 8%, can lower operating costs by attracting more members and services to soak up over-capacity."
E-scan reports that overall, only 48% of credit unions have such fee income-producing, overdraft privilege programs, Cahill pointed out. One of the specific challenges in the past six or seven years has been the ability of spread income to generate a positive bottom line, he added. In other words, credit unions have experienced an increasing reliance on fee income to break even. From 1990 to 1997, return on assets less non-interest income ranged from about 0.2% to 0.6%. However, since 1998, ROA less non-interest income has been very close to zero, and in both 2003 and 2004 was actually negative by negative 0.2%.
"Based on the economic outlook and rate trends for the past two economic expansions, credit unions may be looking at an average reduction in their 2005 ROA of 46 basis points or 0.46%," Cahill concluded. [email protected]
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more inforrmation visit Asset & Logo Licensing.
