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How CUs, Banks Compare in Managing Balance Sheets

From: "How CUs, Banks Compare in Managing Balance Sheets", Credit Union Journal, Ray Birch, 4/19/2010

LAKE BLUFF, Ill.-Credit unions did not manage their balance sheets as well as banks in 2009, and it may cost them in the coming year, according to a stress test just released by Moebs $ervices.

Poor balance sheet management was a huge contributing factor in CUs' weak performance in the Moebs stress test (see related story), which shows 2,289 credit unions needing capital assistance. "Credit unions are lagging terribly behind banks in restricting restructuring their balance sheets," said economist and CEO Mike Moebs.

Moebs noted that while banks reduced assets by $700 billion last year, credit unions increased them by $71 billion. "This happened because credit unions had a more difficult time restructuring their balance sheet, and because they had to remain liquid to prepare for more assessments from the NCUA."

Moebs acknowledged the different philosophical underpinnings of banks and cooperatives, which certainly affected balance sheet decisions. "Essentially, credit unions said 'We will not shrink,' and kept the deposits and put them into investments," he said. "Bank deposits increased by 3.3%, and credit union deposits were up 10%."

Credit unions last year retained their loan volume and slightly increased (.5% increase), while banks decreased loan activity. In non-earning assets, banks restructured and shed themselves of buildings, while credit unions did not, Moebs explained. "Banks shrunk in order to maker their capital look better. Credit unions increased assets, making their capital look worse."

Credit Unions & Fee Incomes

Banks decreased debt by $1 trillion-an important move for them, Moebs said. Both banks and credit unions had a reduction in net interest margin, but CUs took a greater hit (15%) compared with banks (8%). "The huge thing that goes counter to everything consumer advocates have been saying is that, surprisingly credit unions-like the banks-have substantially increased fee income. When you take into account that credit unions did not shrink assets and grew, they are lock step with the same 33% increase in fee income by banks."

Moebs noted that credit unions were able to lower non-interest expenses by 5.85%, "getting religion here" for the first time in many years. The big hit, certainly, came from the share insurance fund and corporate assessments-34 basis points. "That hurt credit unions appreciably," confirmed Moebs. "Of all the movements in the balance sheet, the critical number is capital. Credit unions have liquidity problems because of the uncertainty of corporates and the insurance fund. They can't shrink, they increased their fees, decreased expenses, and got hit with lower net interest margin along with a huge assessment. All that made them fall below 10% in capital."

Written By: m.moebs
Date Posted: 5/18/2010
Number of Views: 2347