The gradual rise in interest rates now underway won't have a detrimental effect on most credit unions, predicts one industry expert—and could even be good news for the smallest CUs.
CUNA chief economist Bill Hampel noted that on average about 21% of CU assets are tied up in medium- and long-term assets (including 30-year and 15-year mortgages), as well as investments of five years or more. Conversely, only about 2% of CU assets are in long-term borrowing. "That means 19% of assets are in fairly fixed rates," said Hampel. "Given capital ratios of around 10%, if every credit union were in that position, we would have not much of anything to worry about."
Hampel conceded that some CUs may have as much as 20% to 25% of their assets tied up in long-term, fixed-rate assets, which may lead to some "uncomfortable" times for those CUs. But overall, he said, the prognosis isn't too bad. "I doubt there are many credit unions for whom it would be an existential threat, because most credit unions are pretty conservative about this—and that's assuming a big further increase in interest rates."
Hampel said he expects that long-term rates will only rise another half a point, but said that because short-term rates are still at virtually zero, things aren't particularly dire. "The longer-term rates drive what credit unions earn on their loans and investments, so if all of the interest rates were rising that would be one thing. But the interest rates that are rising tend to be more the rates that drive what credit unions can earn on new assets rather than the rates that credit unions have to pay on deposits, which helps the adjustment process."
With deposit rates remaining steady and loan rates rising, he expects credit unions may actually see some improved net interest margins.
For those CUs that haven't managed their balance sheets to prepare for rising rates, Hampel recommended avoiding putting any long-term assets on the books. "A lot of credit unions approach this by selling (30-year mortgages) and holding the 15s," he said. "If a credit union's portfolio is fairly high in fixed-rate assets of whatever sort, they might even want to think of selling the 15s for a while, because a 15-year asset is still pretty long."
Hampel noted that some members may begin to take money from regular savings or money market accounts and plow the funds into certificates. While last month one-year certificates were paying next to nothing, he said, next month they may be paying anywhere from 0.5% to 1%. "Credit unions may want to lock in some certificate money now for those of their members who want to jump early at the first increase in rates," he said. "They might want to market and encourage some one- or two-year certificates which would protect them if rates go up in a couple of years."
Small credit unions may be the ones with the most to gain in a rising rate environment, said Hampel. While many large CUs have been making substantial revenue in the last few years by buying and selling mortgages, many small institutions haven't had that luxury. Many small credit unions are in the enviable position of being able to watch loan rates rise without having to increase share rates.
"For small credit unions, they don't have to respond to this other than to enjoy it," he said. "Their cost of funds will not go up for the next year or two, because short-term rates are still anchored to zero."
