MADISON, Wis.—One economist is advising credit unions to begin closely monitoring deposits for outflows and to consider new savings products and pricing to fuel loan demand in the next few years as rates rise.
The strategies are important, says CUNA Mutual’s chief economist, Steve Rick, because credit unions are in the middle of a three-year lending “boom” and now need to prepare for some slow years of savings growth.
“We are in the second year of a three-year lending period the likes of which we have not seen in 10 years,” said Rick. “The years with the lowest savings growth are always those first few following the start of a rising-rate cycle.”
Mutual Funds
Rick said much of the slowdown is due to funds exiting for money market mutual funds and other stock market instruments.
“For example, in 2005, the year following the Fed raising rates (after an economic downturn), CU savings growth fell to 3%, which was the lowest we had seen in a long time,” said Rick. “Go back to 1994, another year the Fed began raising rates, we saw 3% savings growth.”
Rick said CUNA Mutual economists, collectively, are forecasting 3% savings growth for next year, following what is expected to be 4% savings growth this year and 4.4% growth in 2014.
Like others, Rick sees the Fed raising rates closer to the end of 2015, and then doing so gradually.
In preparation, Rick said CUs should watch local competitors, and more importantly monitor the CU’s savings products for runoff.
“It’s also time to offer new products—a new money market account that pays a higher rate so your rate-sensitive members have something to transfer their money to. Create a tiered money market account so you only pay the higher rate to the rate sensitive money,” urged Rick. “You need to begin building a pricing strategy.”
Rick also advised watching even the basic share account, not so much for runoff to competitors outside the CU, but for internal cannibalization to a higher-paying instrument, which raises cost of funds.
Each CU Has Own Approach
The strategies credit unions develop, acknowledged Rick, will vary based on unique needs of each institution. He recognized that slowing deposit runoff will be much more important for credit unions with high loan-to-share ratios, than among those with excess liquidity—the majority of the industry—which won’t feel a need to move savings rates higher as quickly.
As other sources have pointed out, Rick said some credit unions are increasing rates today to fuel strong lending.
“Right now 32% of all credit union assets are sitting in cash and investments,” said Rick, noting that during the last rising-rate cycle those funds fell to 25.8% in 2006. “We are sitting at 32% now and we been down to 25%. So we have adequate liquidity in our system.”