By Ray Birch
MUSKEGO, Wis.–One analyst is urging credit unions to do more than just simply structure the balance sheet for a rising-rate environment, saying lessons from the recent past indicate it’s imperative to prepare for many different rate scenarios.
QuantyPhi President Kevin Chiappetta told CUToday.info that many CUs have lost revenue for more than 10 years by preparing for a rising-rate environment, forgetting about the possibility that rates may not go anywhere for a long time.
“Creating balance sheet strategies from a perspective of preparing for the long-promised rate increase has been a near decade-long exercise in frustration,” said Chiappetta. “Many credit unions fell into the trap of thinking that either rates will go up or down, losing track of the fact that sometimes rates don’t go anywhere, which happened for quite a while.”
In that period money has been lost, explained Chiappetta, by credit unions not extending out their assets further to gain more yield.
“I went to conferences, read research … and everyone seemed to think the topic du jour was how to prepare for rates going up, because with rates dropping so low rates had to go back up. But now we are sitting on nine to 10 years of this low-rate environment,” he reminded. “Yes, we bounced up a little in the last year or so. Nonetheless, we are sitting here with shorter-term assets prepared for deposits to leave and reprice at higher levels, and we have been stuck with these low margins—not extending ourselves on the asset side to take advantage of the money that we have had at these lower rates for as long as we had it.”
Underperforming On Income
Chiappetta said what has resulted is typically underperformance on the income side.
“If you knew rates were going to stay down this long you might have extended out a bit, been a little more aggressive on some of the decisions on the asset side,” Chiappetta said. “But we have been cautious on that side simply because we have not taken into consideration how things go when rates don’t move.”
Kevin Chiapetta
He said that credit unions should keep that in mind as the Fed discusses further rate hikes for 2018.
“If I am forced to predict what will happen, and Fed policymakers say there is pressure on rates to go up, consensus is rates are rising,” said Chiappetta. “But I can come up with many cases why rates may not go up too far too fast. Credit unions should be prepared for a number of situations—be prepared for rates to go up, plateau, or go even back down. They should understand how their balance sheet will perform under maybe five or six different scenarios as opposed to focusing on one direction.”
No Extraordinary Amounts Of Risk
Chiappetta said he is not advocating taking on extraordinary amounts of risk, but to get away from thinking that rates will go up, or even thinking that rates may go up or down. He said rates not moving much for a decade has been a new experience for many balance sheet experts, which is the reason many did not address the possibility and lost money in the last decade.
“Many credit unions in the last 10 years said we can’t drop our share rates more, we can’t go negative on deposit rates, and yet our asset pricing continued to creep back toward our liability pricing, so our margins got squeezed,” he said. “The squeezed margins for this long period has been the biggest challenge from an earnings standpoint our industry has faced.”
Chiappetta urged credit unions to keep an open mind about where rates will go in the coming years.
“Look at the entire spectrum of possibilities,” he said. “We have to build a balance sheet that has the opportunity to perform. Now it might perform better in certain rate environments, but it has to also perform at an acceptable level if we encounter other things—things that we don’t foresee, like rates holding steady for all these years. It isn’t just options A and B, there is often that third option, and that is the one that sneaks up on you and hurts you the most.”