LAKE FOREST, Ill.—There’s a good chance the Brexit will have credit unions paying close attention to their fee income.
That’s the call from one economist who, one week following the United Kingdom’s vote to exit from the European Union, sees greater margin compression ahead and raising fee income one of the best ways to address the revenue shortfall.
After the Brexit vote the markets suffered initial volatility and losses, but appear to be stabilizing, said Michael Moebs, economist and CEO at Moebs $ervices.
“Global equities experienced initial sharp falls, but are rising with the exception of bank stocks. U.S. bond yields have been falling all year with increased demand and Brexit has only driven yields lower as investors seek safety in bonds,” said Moebs. “The U.S. bond markets are reflective of the uncertainty and long-term implications for global markets. It appears long-term interest rates and bond yields will be low for some time.”
Rubber Meets Road
Moebs said that key interest rates are where the rubber meets the road for U.S. credit unions, noting that due to Brexit it is likely now that the Fed will only raise rates once through 2017.
“Long-term bond yields have fallen significantly with Brexit. Ten-year bond yields today are 1.49% for U.S. Treasuries, 0.96% for British gilts, and -0.11% for German bunds. These yields reflect the strength of these economies with a negative yield having the highest price or showing the best economic strength of its economy. This means interest rates on U.S. mortgage and car loans will fall. Interest rate margins on credit union income statements will get squeezed.”
The consumer will like the lower rates but credit union bottom lines will not, said Moebs, adding that CU 2016 budgets will be difficult to make.
Michael Moebs, Moebs $ervices
With net income falling, credit unions have three choices, said Moebs: “Either increase fee revenue or decrease non-interest expense, or both.”
Moebs acknowledged that CUs are reluctant to increase fees.
“But they need to move away from thinking they have to raise fee prices,” said Moebs. “What they need to do is increase transaction volume and therefore increase the amount of fee revenue.”
Millennial Checking Accounts
One way to do that is to attract more checking accounts from Millennials, as studies have shown that this generation averages 60 to 100 checking transactions per month, about twice that of the average consumer.
Moebs said CUs can increase overdraft volume and revenue by lowering the overdraft price, which for CUs stands at a median of $30 today.
“We have found that as credit unions decrease overdraft price they get more overdraft volume and their overdraft fee revenue increases,” said Moebs.
Turing to expenses, Moebs contends that CUs are overstaffed and can save money by either reducing headcount through cutbacks, or by not filling positions when someone leaves.
Moebs contends that if the CU cuts back on staffing it can maintain or even improve current efficiencies by providing staff with incentives.
“Let employees know that you will give the department half of the salaries of those who leave. So they get half of the money in higher pay and the CU bottom line gets the other half,” said Moebs. “We have seen this work well at credit unions. The staff is happier, they work harder, and are more productive.”
Moebs emphasized that it is important credit unions make these kinds of decisions soon, as the U.K.’s exit from the European Union will not be quick, exacerbating the problem.
“It will take time for Great Britain to work out a transition from the E.U.,” said Moebs. “The agreement Great Britain has with the E.U. has a clause, called Article 50, which gives up to two years to negotiate an exit. Trade agreements need to be forged, which will probably end up being similar to what is in place now with new fees replacing E.U. charges. Migration will slow as free movement within European countries and Great Britain is ended. Most important is the impact on London financial markets. In the transition London will lose business to New York, Zurich and Hong Kong.
Look To Income Statement
“The bottom line produces the capital that drives growth for credit unions,” noted Moebs. “So, the solutions lie in the income statement. Fee revenue budgets for 2016 must be exceeded and 2017 fee revenue budget goals set higher. Non-interest expenses and cost must be reduced, as well.”
CUNA and NAFCU economists have stated the U.K.’s vote to leave the European Union should not have any long-term negative effects on the U.S. economy and on credit unions, but in the short term they expect market volatility and increasing deposits. The U.K.’s decision, too, in pushing down interest rates, could lead to a mini refinance boom, economists are predicting.
“Brexit is just a continuation of September, 2008, when Lehmann went bankrupt and the Great Recession started,” concluded Moebs. “The business of being a credit union has changed to signal more fees and less expense.”