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Accessing Predictive Superpowers: Economic Patterns and Trends
Friday, February 2, 2018 6:35 AM

Casey Peterson, Senior Advisor, Catalyst Corporate FCU

If you could have any superpower, what would you choose? Invisibility? Flight? Time travel? I bet many of us in the financial industry would want to have the ability to predict the future. Think of the possibilities. The good news is, that predictive superpower is somewhat obtainable with access to the right patterns and trends.

The reality, however, is that even “somewhat obtainable” predictability is not completely foolproof. But it’s a good place to start. Based on information already available on 2017 financial performance, credit unions can realistically expect to see the following in 2018:

Interest in Interest Rates.
After almost 10 years of low interest rates, we are now in the midst of a sizeable increase in short-term interest rates. Fed funds have moved from a low of 0.25 percent to 1.50 percent with the expectation of reaching 2.00 percent by the end of the year. The 2-year Treasury has also increased to 2.06 percent, and as the rest of the yield curve moves higher, more challenges will play out on the balance sheet.

Finding a Balance.
As interest rates increase, expect investment portfolios to begin producing a portfolio return that approaches 2.00 percent. From a balance sheet standpoint, higher investment returns will put pressure on loan pricing. Loan pricing should eventually adjust higher in order to maintain the relative value relationship to higher risk-free investment returns.   

On Good Terms.
Term and non-term deposits will also be subject to upward pricing pressure. The cost of funds for all credit unions is about 55 basis points. But with Fed funds anticipated to reach 2.00 percent and the stock market continuing to improve, competition for funds will creep into the credit union deposit universe. 

Looking at Liquidity.
Currently, large credit unions are experiencing promising share growth. However, credit unions with less than $500 million in assets closed out 2017 with flat to negative share growth. Because of this disparity, liquidity may present a challenge in the back half of 2018. If this trend continues, coupled with the increased pricing competition for deposits, liquidity planning and management will be a major point of emphasis in late 2018.  

While we may not possess superpowers (yet), we do wield the important power to plan and strategize based on patterns, trends, and available information. Resources like this 20-minute video from Catalyst Corporate can help credit unions explore various economic factors that may affect credit unions in the future.

Catalyst Corporate Federal Credit Union is a five-star endorsed business partner of Credit Union Resources, Inc., a wholly owned subsidiary of the Cornerstone Credit Union League.