LOMBARD, Ill.-Looking for a little relief from margin compression? Don't look for it in 2013. Looking for what to do about it? Look to members and new pricing models, according to one analyst, who predicts margins will be even tighter this year.
What's placing additional margin pressure on credit unions, asserted Bill Handel, VP of research and development for Raddon Financial Group, are repricing assets that will lower yields. "However, both the asset and liability sides have to be managed much better in order to optimize spreads."
Handle says attention should be first turned to what credit unions are paying on deposits, noting that many CUs are paying 10 to 15 basis points on regular shares and need to drop that down.
"We have seen a couple credit unions drop their base savings rate down to one basis point. Look closely at CDs. Many credit unions are at 50% loan-to-deposit ratios and yet still pay 1% to 1.5% on CDs. I don't know if they can continue to afford that."
The Biggest Impact
But the biggest impact on the spread will come by generating more loans, advised Handel, who recommended turning to existing members to gain greater share of their loan dollars.
"The typical credit union only controls one out of four loan dollars their members have. More credit unions, too, need to look at risk-based lending. I am not encouraging taking undue risk, but we have become somewhat risk averse as a result of the economy. Reach down a little deeper into the B levels to get better yield."
Handel also advised initiating first-time borrower programs to gain yield, as these borrowers pay a higher rate and typically have very low delinquencies.
Another area to pay attention to, according to Handel, is the growing compliance burden stemming from more rules out of Dodd Frank, but especially from the CFPB. As many analysts have cautioned, credit unions must brace for CFPB actions around overdrafts. "Credit unions today should look at their business and pricing models and answer the question: 'How would I survive if I lost half of the overdraft income I have now.'"
All of the margin pressures make it more imperative, said Handel, to diversify non-interest income sources. "Credit unions need to look more toward CUSO-based activities, activities that don't necessarily impact assets and liabilities but can generate non-interest income."
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