By Ray Birch
LAKE FOREST, Ill.—Financial institutions—especially credit unions—are facing a “double whammy” that’s likely to extend their economic struggles well after the pandemic ends, asserts one analyst.
Michael Moebs, economist and CEO at Moebs $ervices, is warning low oil prices--turning negative for a barrel of oil for the first time--will negatively impact net interest margins well into the future.
“Low oil prices will last but COVID-19 won’t,” Moebs told CUToday.info. “After COVID-19 subsides, there are critical questions for banks, credit unions and thrifts: What drives the price of oil? What are the implications of a lower oil price? And how does oil affect net interest margins?”
To answer those questions, CUs in the long run will need to lower fees to drive greater volume, add fees on products that did not previously carry them, and move to a more remote workforce to reduce expenses, such as operating space.
And credit unions, emphasized Moebs, will have to work especially hard to make adjustments, as they are leading the way among financial institutions in helping their members during the deep economic downturn, forgoing significant revenue by deferring loan payments and eliminating fees.
Several credit union CEOs have told CUToday.info they are uncertain about their futures if the pandemic continues for an extended period, with one credit union in Colorado reporting it just experienced its largest one-month loss in its history.
The Moebs' analysis comes as oil markets have seen a spectacular collapse, with U.S. oil prices plunging below $0 Monday to $-37.63 a barrel. That's the lowest level since NYMEX opened oil futures trading in 1983according to CNN Business.
Over a Barrel
But what does oil have to do with Moebs’ concerns around the price per barrel and net interest margins at financial institutions? The answer requires a little history.
Moebs pointed out 50 years ago, in 1970, a gallon of gas was 39 cents and the Consumer Price Index (CPI) was 39. The CPI was 256 at the close of 2019.
“The CPI difference is 6.5 times the base of 39 from 50 years ago,” said Moebs. “So 39 cents times 6.5 equals $2.53—or much higher than the current gas price at $1.82. If an oldster declares, ‘Gas was cheaper when I was a boy,’ say, ‘Inflation adjusted it is cheaper today.’”
Inflation since the early 1970s has averaged about 4.4% a year, noted Moebs.
“This is above the Federal Reserve’s current inflation target, but realistic given what has happened in the marketplace economy in the past 50 years with wars, economic growth, recessions, political calamities and now COVID-19,” explained Moebs. “It also shows a gallon of gas above $3, only four to six months ago, was too high.”
The ’Same Old, Same Old’
Michael Moebs
Moebs asserted that what was once a cartel of oil-producing nations, led by Saudi Arabia, has too many members.
“It’s not a cartel at all anymore. The Saudi Arabians can produce a barrel of oil for less than $10. So, why shouldn’t they flood the market with oil, reduce the number of oil cartel members, turn the cartel into a monopoly or an oligopoly, and create some political intrigue along the way?” asked Moebs.
Oil prices changed significantly in 1974, 1979, 1986, 1990, 1999, 2002, 2009 and 2015—and once again in 2020, Moebs said.
“In these years, the Saudi Arabians took significant steps and limited oil cartel membership and reduced or increased oil price. Today is just the same old, same old,” he said.
Cost of production is a major factor in oil prices, noted Moebs.
“Countries producing oil at $40-plus a barrel, for instance, Russia, Venezuela, Brazil, Norway, Canada, and the United States, will need to curtail production if the Saudi Arabians keep oil prices low. Oil producers can’t offer operating prices at below cost for long without being forced to stop offering their products as low-cost providers take over the market,” he said. “At low oil prices, are countries producing oil above $40 a barrel really energy independent? The same thing is true in the depository industry. How long can a checking account keep losing money?”
Following the Price Down
Net interest margins of financial institutions will be victims of oil prices, asserted Moebs.
“Low oil prices will drive down interest rates. The 10-year U.S. Treasury bond rate has fallen over 50% as the oil price has fallen over 50% in the past two months. Auto loans, mortgage rates, and all other consumer loan prices will fall reflecting Treasury rates,” he said. “After COVID-19, oil prices will last. So, the light at the end of the tunnel is a small light of very low oil prices. When the coronavirus is gone low net interest margins will be left. What is left is more fee revenue and lower expenses for the future to maintain capital and growth. It’s a double-whammy on all fronts.”
Any credit union that responds by raising fee prices and reducing expenses—including cutting staff—is making a mistake, according to Moebs.
“Social distancing will become a way of life. Working from home for depository staff positions is a strong part of the new social norm. New fees for loans, deposits and transaction accounts will be a long-lasting feature,” Moebs said. “The new reality is this: working from home will become less expensive for employee and employer, and fees will also become less expensive for the customer and member.”
Learning Quickly
Employers need to learn quickly how to handle the new remote working environment, said Moebs.
“When COVID-19 is over, streamline every function,” he said. “Lower fee prices to help depositors cope with COVID-19 and do this by refunding a fee whenever asked. The lower refunded fee prices will teach how revenue won’t fall but actually increase to produce more revenue because of volume. When COVID-19 is over, lower fee prices to gain more volume and more revenue.”