Posts

/by

More Certainty Over The Direction Of Interest Rates?

,

Following the January 25th meeting, the Fed released a forward-looking rate forecast.  This forecast shows the range of predictions made by Fed officials about the level of short-term interest rates in the fourth quarter of 2012, 2013 and 2014.  The forecast also estimates when the Fed expects to begin raising short-term rates, and describes what the Fed plans to do with their investment portfolio.

The rationale for this change in policy is to provide more clarity for businesses and consumers as to the direction and level of short-term rates.  The hope is that it will spur additional borrowing and economic growth (though it is possible this will not have any material impact on businesses or consumers, as most already expect rates to remain low for a while).

However, this shift in policy raises several questions that decision-makers should consider:

  • How might other financial institutions respond? Now that the Fed announced rates are likely to remain low into 2014, do financial institutions further adjust loan pricing—dropping rates even further?
  • Will financial institutions take additional risk in their loan and investment portfolios by extending maturities?
  • Will there be additional market demand for short- and medium-term investments, further driving down yields?
  • Does this push decisions to “hedge” balance sheet risk further down the road, at which time hedging could become too expensive?
  • Why is the “risk management” function in place? To inform decision-makers about how the institution could fare in the face of unlikely events.  Institutions that put too much reliance on Fed forecasts might spend less time preparing for the unexpected
  • Is the Fed always right? Consider Fed Chairmen Ben Bernanke’s quote from his July 2007 testimony to Congress when he said, “Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy’s underlying trend.”  Unfortunately, the economy worsened materially in 2008

The Fed is a group of people, each with their own opinions.  They also do not have total control over all of the factors that would impact the level of rates.  Therefore, the Fed forecasts could be wrong.  However, the forecasts might lead to overconfidence, causing institutions to make decisions they might not have made otherwise.

Sources:
Fed Expects Low Rates Through 2014, WSJ, 1/26/12
Semi-Annual Monetary Report to the Congress, Federal Reserve Board, 7/18/07

/by

Auto Lending: The Concerning Slow Decline

, ,

Traditionally, auto loans have been the “bread and butter” of credit union loan portfolios.  However, 1st mortgages have claimed that honor with short- and long-term trends showing continued declines in auto loans as a percent of total loans for the credit union industry’s balance sheet.  Auto loans have been consistently decreasing from roughly 40% of total loans in 2000 to 29% as of June 30, 2011.  The green trend lines reflect distribution changes since 2000 (long dash) and since 2007 (short dash)—which show little fluctuation in trend.  If the trend since 2007 is realized, auto loans will be down near 24% by December 2014.

Keep in mind that year-to-date auto sales in 2011 are up by 10.4% compared to 2010 according to Ward’s Auto Group.  Also, according to the Wall Street Journal, Chrysler Group LLC said recently its sales leaped 31% in August, while General Motors Co. and Nissan Motor Co. each reported increases of just under 20%.  Ford Motor Co. posted an 11% gain.

While some meager growth in used auto lending has occurred for credit unions from Q1 to Q2, the industry’s auto portfolio overall is on track to shrink another 1.6% in 2011.  Consider that the banking industry (FDIC-insured institutions) is on track to grow autos around 13.6% in 2011 according to FDIC data.  While overall non-revolving loan market share for commercial banks has traditionally been around 3 times that of credit unions per the Federal Reserve’s G19 release, the difference in growth rates and the downward trend is still quite concerning.

What’s The Point?

Some credit unions may have lost their focus on one of the primary things that made them great in the first place—auto loans.  Additionally, the continuing trend of increased 1st mortgage balances (which could be significantly extending balance sheets) is somewhat alarming in light of interest rate risk concerns; 1st mortgage balances are positioned to grow almost 4% in 2011 for the credit union industry.  While Bernanke is on record “forecasting” an extended period of a low target rate, we know that forecasts do not always come true.  Consider this past quote:

Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy’s underlying trend.

Fed Chairman Ben Bernanke
Semiannual Monetary Policy Report to the Congress
July 18, 2007

Each credit union is unique and must be armed with the right decision information in order to focus resources appropriately.  Understanding local demand trends and being positioned to take advantage will be even more critical going forward as banks and captive auto finance companies continue fighting for (and dominating) this piece of the consumer pie.  As we see it, it may be time for credit unions to take up the fight to more aggressively attract some of the auto market back.