CHICAGO—Credit unions should prepare for what could be a big outflow of deposits when rates begin to rise, according to one CEO who says the biggest movement may occur when short-term deposit rates approach 1.5%.
Alliant CU CEO David Mooney is further cautioning that money is likely to move out faster with this impending rising-rate cycle—which analysts predict will occur later this year—due to the emergence and consumer acceptance of online banks and the ability to move money online easily and quickly.
“I think after years of being awash in liquidity, once market rates start going up we could be hearing a big sucking sound from depository institutions,” said Mooney.
Mooney, as other pricing experts have shared, said that the tremendous amount of investment funds sitting on the sidelines in low-paying instruments, including checking accounts, has not been rate sensitive due to the fact rates are rock-bottom.
“I have a theory that when deposit rates are below a certain point, maybe 1.5%, they are just too low to be interesting to savers,” said Mooney. “To them, 95 basis points and 15 basis points both pay below 1% and therefore are not interesting. But as rates go up they will quickly become more compelling to consumers, and they will then discern who is paying the better rates.”
Money Market Funds Move First
Look for money market funds to be the first to move rates high enough to attract interest, said Mooney.
“They will respond quickly because they have been out of favor for so long,” he said.
Credit unions, too, should brace for the impact of online banks that were not around in the numbers they are today when the last rising-rate cycle occurred.
David Mooney
“We will see more competition than we have in the past, especially from the online lenders whose low cost structures let them offer high rates,” said Mooney. “And it’s so much easier to open accounts online today and move your money. It’s basically frictionless.”
The $8.4-billion Alliant, which has few branches and relies predominantly on remote delivery, has very low operating costs that allow it to pay top-of-market deposit and loan rates, Mooney explained. As of Aug. 17, the CU paid .95% on its savings account, a rate raised three times in the last 12 months.
“We pay superior rates through thick and thin,” said Mooney. “Our rate increases this year have not been so much about our expectation of rates rising as much as they have been from calculations on our part that we can not only pay these higher rates today but sustain them over time. It’s simply about giving the most back to our members and being confident we can do so.”
Mooney emphasized the higher rates the credit union pays are not promotional and do not come with special requirements, such as deposits being new money. As of Aug. 17, Alliant paid 1.2% APY for on a one-year CD and 1.35% for two years.
“We don’t look for temporary relevance, which we think is actually destructive and to some extent deceptive,” said Mooney. “We are committed to providing consistently superior value and every day great rates.”
Ready For Rising Rates
Mooney feels the high deposit rates place Alliant in a strong position entering a rising-rate cycle. He also credits restructuring the balance sheet.
“We have been expecting rates to rise, so we kept our balance sheet positioned accordingly and stayed relatively short,” said Mooney. “We have been willing to give up some yield on our assets in return for being better positioned for rising rates, which has actually helped us as yields have continued to come down—we have not been quite as impacted by this drop because we already took that pain.”
Alliant has been fortunate to see its net interest margin widen in the last year as lending has increased.
“Historically our loan-to-share ratio has been low,” said Mooney. “So out overall blended asset yield had been relatively low. But we always offset that with very low operating costs. But over the last several years we have been building up our loan business. And since we are very efficient, as we have seen our interest income increase our interest margins have widened.”