WARRENVILLE, Ill. — When it comes to serving niche markets, consolidation may not be as bad for the banking industry as some perceive.
The mergers and acquisitions of banks over the past decade have led many financial institutions to partner up with nontraditional players to offer a full array of services to customers. Included in that mix are credit unions that have sought out these relationships as well, especially with regional broker-dealers. Some in the industry say some of the regionals' "aggressive" sales strategies have led them to cornering the market while others believe there's room to compete and even surpass what they are doing. It's not necessarily "good customer service" some argue. These partnerships are strongly intact even when corporate credit unions are offering better rates.
"The advantage broker-dealers have is they hire sales people–they're paid when they sell products," said Tom Moore, president of Balance Sheet Solutions, LLC and executive vice president, asset liability management at Members United Corporate Credit Union. Balance Sheet Solutions is the broker-dealer for the corporate CU.
Moore said when it comes down to it, sales people "don't get paid if they don't move paper."
"Having said that, some regional brokers that are able to position securities, depending on the pool of security, might have access to securities that others don't have," Moore said.
Credit Union Times was hard pressed to find credit unions willing to go on record to talk about their relationship with regional broker-dealers. Some were concerned about giving the impression that they were "bashing" corporate credit unions.
To compete, Moore said for Members United Corporate, the goal is to enable strong performance, which includes establishing a relationship with another broker-dealer to set up educational services that would bring credit unions up to speed on methodology. Balance Sheet has the ability to sell securities, but it also has advisory services, and customized structures for corporates, Moore said. It takes the approach of doing what's best for members "not what moves paper." He strongly urged that credit unions check the NASD BrokerCheck section at www.nasd.com to check credentials and registration and license status.
"With most broker-dealers, we see that the intent is correct," Moore explained. "Sometimes it gets blurred when the main thing is when you're only selling or getting a trade. We focus on the entire balance sheet."
Memphis-based regional broker-dealer Morgan Keegan & Co, has relationships with credit unions all over the country and prides itself on the long-term alliances it has built within the movement over the last 15 years, said Terry Robertson, managing director of fixed income research.
"We understand credit unions' unique mission and we take a total balance sheet approach versus looking at just the investment portfolio," Robertson said.
Another component Morgan Keegan brings to the credit union model is a heavy emphasis on education including a solid understanding of buying bonds through its "bond school," held five times each year to a pre-purchase analysis requirement for all portfolios, Robertson said. Just as critical in cementing alliances with credit unions is the mandate among all financial regulators, including NCUA, on ensuring that risk is measured, monitored and controlled and explaining how interest rates are going to affect the portfolio. "We had already been doing ALM and accounting but this placed an even greater emphasis on senior management and the board [at CUs] to be responsible for oversight," Robertson said. "That was a critical point in advancing our balance sheet approach." Some in the industry say some credit unions are sticking with regional broker-dealers despite times when corporates are offering better rates. Robertson said that's not necessarily the case. Citing an article from WesCorp, he agrees with one of the points that credit unions are leaving a lot of money on the table by purchasing agency securities versus corporate certificates.
"I agree that agencies are higher in credit quality as they carry an 'AAA' rating and an 'implied' government guarantee versus the corporate certificates and [the article] acknowledges they need to pay a higher rate in order to attract investors," Robertson said.
The article goes on to compare "highly rated" (AA) US bank paper with a three-year term currently trading at about 47 basis points over the three-year Treasury to a three-year agency bullet currently trades at 27 bps over the three year Treasury. Bottom line: the market clearly differentiates yield based on credit. Robertson said he used the comparison to drive home the need for corporate credit unions. "If you look at the corporate bond versus the agency bond, I don't know if they can replicate every bond in the investment world," Robertson said. "At the same time, I recognize the benefit of a corporate, particularly to smaller credit unions who perhaps don't have the resources dedicated to [managing] their investment portfolio." Morgan Keegan works with several corporates and most of its credit union clients have more than $100 million in assets. But some believe corporates still have ground to gain before they can be on the same competitive playing field as regional broker-dealers.
"Ten years ago, [corporates] were sleepy little organizations that waited on taking orders but now they're trying to catch up," said Kent Gleason, executive vice president, Kansas Corporate Credit Union.
Gleason strongly believes that hiring "the right people" will make all the difference in being able to do what the regional broker-dealers are doing. Corporates can have leverage because they know how to "add value" through properly trained staff. "As corporates train up and staff train up and more knowledgeable types are put in the field, we will continue to chip away at [regional broker-dealers'] share of the market," Gleason said. "I think one day we could be neck and neck."
Moore said corporates were not chartered to be broker-dealers, but that shouldn't stop the creation of a centralized operation to compete. Some argue that is already in the works with U.S. Central Credit Union's ISI investment subsidiary, which continues to add more corporates as clients. A number of large corporates have shuttered their broker-dealer subsidiaries because of the cost and compliance burdens, and have moved to ISI.
As an industry, corporates have roughly 35% invested in their shares or certificates so there's still a large amount of funds out there they can help facilitate for members. Moore is not advocating that a bunch of independent corporate-CU owned regional-broker dealers get formed to compete with regionals, instead suggesting large-scale partnership so the model is "not replicated 20 times over."
"We know that the universe of credit unions is shrinking," Moore said. "If corporates want to capture additional market share, in many cases, because of share diversification, we have to be involved in the securities business."
Robertson reiterated his take that corporates are "critical" comparing them to the relationship that the Federal Home Loan Bank has with banks.
"They lend money and they do it well," Robertson said. "They are a liquidity facility."
On the same page, Robertson said Morgan Keegan provides strategies and solutions and doesn't just sell bonds. "We're just as interested in long-term relationships," he said. –msamaad@cutimes.com
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