4 minutes
Don’t let them hamstring your liquidity.
This blog post is based on c. myers' new article, "Liquidity, Shifting Gears."
After so many years in an environment where credit unions were flush with deposits, the tide has finally turned. Actually, it’s been turning for a while, but loan-to-share ratios are just now getting near pre-crisis levels.
The good news is that higher loan volumes at higher rates are helping profitability. However, calculations done using data from the National Credit Union Administration and Callahan & Associates show that 20 percent of credit unions over $1 billion in assets have loan-to-share ratios above 100 percent, up from 14 percent a year earlier. That means tighter liquidity, and tighter liquidity means competition for deposits.
Liquidity pressures can be addressed in a variety of ways, but let’s focus on deposits. Deposits are integral to credit union business models; they directly serve members; and they’re typically the least expensive source of liquidity.
While creating a great deposit strategy for the future, consider the same types of strategic questions that have traditionally been asked about loans: Why should someone deposit with your institution instead of somewhere else? Will the pricing, volumes, and mix be profitable and sustainable?
Not only has it been a long time since there has been widespread competition for deposits, it’s different this time around. Do a quick Google search for “best apps for saving money” to see what some of the new competitors are offering. It’s not just a simple, streamlined user experience. It’s also goal-setting, rewards, and gamification to make saving interesting. Combine that with the ability to open accounts from anywhere via mobile and move funds with the click of a button, and it’s clear that thinking differently and creatively about engaging members in the saving experience will be a key to success.
Another avenue that will be important in the battle for deposits is using the business intelligence every credit union has on its current depositors. Use it to understand what types of members save. For example, analyze and correlate which other products they use, whether they start with a loan product, how much they save, and if their deposit activity plateaus and when. Then use that information to structure new products and marketing campaigns.
Keep in mind that the strategic focus the industry has placed on 18- to 29-year-olds may be entirely appropriate, but likely won’t help much on the deposit side for many years since that age group simply doesn’t have much to deposit. This reality should factor into the credit union’s strategy.
As loan-to-share ratios continue to climb, credit unions can expect steeper deposit pricing and liquidity pressure against the backdrop of a highly competitive marketplace. Most credit unions’ business models are not structured to compete on price alone, so it will be critical to have clarity on the strategic questions on the deposit side.
As you formulate your strategy, test multiple scenarios and factor in the unexpected: higher deposit pricing, lower deposit volumes, and deposit mixes that are more reliant on CDs. Test tapping into different sources of liquidity to fully understand profitability if member deposits underperform. The combination of a great deposit strategy that strengthens relevance to members, and a deep understanding of the profitability of that strategy, lends powerful support to sustainable business models as the environment continues to change.
c. myers corporation has partnered with credit unions since 1991. The company’s philosophy is based on helping clients ask the right, and often tough, questions in order to create a solid foundation that links strategy and desired financial performance. c myers has the experience of working with over 550 credit unions, including 50 percent of those over $1 billion in assets and about 25 percent over $100 million. They help credit unions think to differentiate and drive better decisions through real-time ALM decision information, CECL consulting, financial forecasting and consulting, liquidity services, strategic planning, strategic leadership development, process improvement, and project management.
