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A/LM Education and Anticipating What is Top of Mind

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We are looking forward to hosting 3 days of asset/liability management (A/LM) education next week. Often our education classes will have a similar foundation of how to use A/LM to make decisions, how to identify what environmental factors to watch, and how to see potential problems that might be hiding in the modeling—to name a few. Beyond the base topics, there are always new things happening that also become part of the discussion. These new topics are driven by the things at the top of decision-makers’ minds. As part of preparation for the A/LM education courses, we always work to anticipate what people are most worried and excited about.

Here are some of the things we think will be a focus of attendees during our upcoming classes.

Rates

How are rates changing and what it could mean about the economy? A great example of uncertainty has been happening in the past two short months of 2016.  Consider short-term rates, where the news has confidently expressed each of the following perspectives:

  • The Fed is going to increase rates at least four times in 2016 – Much of January
  • The Fed is not going to increase rates in 2016 – Much of February
  • The Fed is going to increase rates two times in 2016 – Currently

While the rate change amounts are small – from a big picture perspective – the larger concern for credit unions is often the reason for the change, since it represents different outlooks for the economy. The various paths that the economy can take may have an impact on members’ mindsets, and result in shifting behavior. The behavior can impact different areas of credit union growth. For example, which of the above paths could play a role in slowing the fast consumer loan growth the industry has been experiencing?

Of course, beyond short-term rates, there are also a lot of questions swirling around long-term rates.

Stock Market

Another area of uncertainty has been the stock market:

  • The market is falling quickly and could experience another 10% correction – Much of January
  • The market is rebounding and should stabilize – Early February
  • The market is dropping, and this time it could be sustained – Mid February
  • The market is climbing and making up most of the loss this year – Currently

Each of these paths also impacts the mindset of members. Which of these paths, if they were to continue, may lead to more deposit growth? Which could cause deposits to shrink? What could each of the paths do to lending?

Technology

What new technologies are being released and what are their potential impacts on how people will look to get things done in the future? Three days could be spent on this topic alone, but a prime example of this is Amazon Echo, which came out in 2015. So far this year, there are a lot of parties looking to interface with this product, so they can be part of the new generation of home automation, with the objective of making it easy for consumers to get things done. Currently, Amazon Echo is making it easy to get a lot of things answered or done – such as what the weather will be, if a team won, what the best Italian restaurant is in the area, adding events to your calendar, buying things from Amazon, or adding items to your shopping list.

As other parties are hooking up to the Echo, they are providing new conveniences like making it possible to change the temperature in your house from your car, or helping you locate your misplaced keys. What does this have to do with uncertainty for credit unions? Beyond the potential direct impact of even more routine shopping happening through Amazon (where hopefully your member set up your credit card for one-click payments), there are other potential impacts to depository institutions. Will people be asking their device where the best place is to get a loan, or which places will give the best rate? The same could be true for members looking to transfer money to a better money market rate, or finding the best rate on a 1-year CD. Will people be able to send instant payments just by vocalizing it as soon as the thought occurs? Adoption of technology is always a hard thing to predict, but the impact on a member’s mindset, and their desire for things to be even easier, is to be expected.

It is impossible in a blog to cover all of the things that will be on attendees’ minds in our 3 days of A/LM education, but these are a few of the things that we think will be brought up.

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Investment Value

In previous posts we have discussed the increase in long-term rates and the potential impact to loan generation as rates rise. Due to long-term rates continuing to climb this week, we thought it would be beneficial to discuss one of the impacts to investments.

From Bloomberg the morning of 7/9:

One thing that has occurred in this low rate environment is that many institutions are reaching out longer with their investment portfolio to pick up more yield. Note that a 1-year investment yields less than many overnights. The longer investments bring more return, but also more risk. This trade-off is magnified as the upside of such a low-yielding long investment is minimal and it does not take a large increase to wipe out the return.

For example, a month ago an institution could have purchased a
5-year bullet with a yield expectation of 1.09%. A month later, as rates increased 39 basis points, the value of that same bond dropped almost 2%. In fact, a 5-year bullet yielding 1.09% can have a 1.09% loss in value after only a 23 basis point increase in rates.

While the intent of the investment purchases may not be to sell the investments in the future, understanding the potential change in value is beneficial, as the value can impact the flexibility an institution has to alter its structure. The recent increase in rates is a reminder of this, but is a small sample compared to some of the larger changes that history has shown us.