Prolonged Low Rate Environment?
For months many have been watching and wondering when the inevitable increase in market rates might materialize. Now, with some economists projecting that rates will stay at historic lows for another 12-18 months, credit unions should evaluate how, or if, they can continue to maintain net interest margin and ROA.
Not all institutions have room to lower deposits enough to mitigate the continued erosion in the yield on assets. In a sense, deposit pricing is reaching a “floor” for many credit unions. All else being equal, ROA will continue to erode and interest rate risk profiles will weaken as higher-rate loans and investments roll off, being replaced with lower yielding assets.
So what should credit unions do? Common strategies include looking beyond the margin and evaluating expenses, as well as potential new sources of non-interest income. As mentioned in previous posts, some institutions are stretching for yield, either in loans or investments. If this strategy is employed, institutions need to carefully monitor the impact on the risk profile, and make sure decisions are tested beforehand and fit within the credit union’s philosophy and A/LM policy/guidelines.
Finally, some institutions have chosen to not take any drastic steps at this time, and have instead begun to adjust expectations at both the employee and board level, re-evaluating what success looks like in this environment. One potential saving grace is that loan losses seem to be stabilizing in many areas, but should not be taken for granted given what institutions have experienced over the last two years.
