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It's the Best of Times
and Worst of Times By Mary Auestad Arnold November 4, 2009 "It's
go time." That's the message Peter Duffy has for healthy credit unions in
the current economic and competitive environment. "There's never been, and
perhaps will never be, an opportunity like we have now to really make a difference
in our business, in our community," he told his CEO/Executive Team Network
extended workshop audience, yesterday in "Whatever's in your way, you've got to get it out of the way, and whatever is your biggest strength, you have to take advantage of it." But keep in mind that in today's commoditized financial services marketplace "good service and competitive rates delivered by nice people" are not an advantage. They are a cost of entry, or table stakes, Duffy, associate director at Sandler O'Neil and Partners, L.P., New York, said. Example: Phones at eight of 10 community banks are now answered by humans rather than automated attendants.
"Commoditization also means incremental profit comes largely from volume (new relationships/increased share of wallet)." So sales and marketing are musts. "We need more dollars for marketing and every penny needs to be spent shrewdly." In fact from a business/efficiency standpoint—in ways that don't impact members—Duffy said credit unions "need to be ravenous pigs for profit" to help pay their regulatory compliance tabs. Unfortunately, "some of the best run, fastest growing credit unions had been forced to put the breaks on even before corporate stabilization" due to delinquencies and capital concerns, he noted. "The best-of-class local financials [should be] part of the solution to the recovery, but some of the best-of class CUs may not be able to stay in the field. "It is the responsibility of senior management and the board to remove obstacles to enable the CU to leverage core strengths and protect the interest of members," Duffy continued. A current obstacle keeping some CUs on the sidelines is not knowing the future cost of corporate stabilization. When NCUA released the results of its stress test in late September, the analysis "produced an allocation of $32.6 billion in losses resulting in 38 failures with a maximum exposure to the NCUSIF of $577 million using the baseline assumptions." But, Duffy asked session participants, if the potential losses are $32.6 billion, why only a "maximum exposure" to the insurance fund of about $.6 billion? Where would the other $32 billion come from? Summarizing an answer from the audience, he said, "NCUA is expecting large healthy credit unions to merge in the wounded ones." And if it runs out of "takers," ("nothing is more distracting or damaging to a company than to do a bad merger"), NCUA would need to assess the movement for the shortfall. NCUA seems to say as much in the "Implications for NCUSIF" section of its report: "Increased levels of failures at some point are expected to result in increased levels of NCUSIF losses due to the reduction in the number of healthy combination partners able to absorb failed credit union assets and liabilities. Lower demand for mergers and acquisitions will likely lead to higher resolution costs and an increased number of liquidations, which require the NCUSIF to maintain higher levels of liquidity." Indeed, using the more adverse assumptions in the stress testing, potential losses would rise to $56.4 billion, which NCUA estimated "would result in 519 failures at a maximum exposure of $15.5 billion to the NCUSIF." "The credit union system has an unlimited contingent liability on your capital," Duffy said, estimating that $32 billion would equal 500 basis points over five years. "It is imperative that you recognize the need to understand and quickly deal with the risk the system represents to both your CU's capital and its future. "This is a defining moment," he continued. "You need to consider things you didn't want to consider before; it can become plan B in the drawer if you need it. "Meanwhile, tweak [your business plan] to the needs of your market and members to leverage into more households and leverage your capital. "The key success factors for market share growth," Duffy suggested, "are the will to win, to tee it up in areas that might make you uncomfortable; your state of readiness; and effective sourcing and use of capital. "The competitive implication of doing nothing is potentially stunning," he said. "Once large money center/regional banks recover, they will be more focused on retail," CUs' market. "The next three to five years are truly franchise defining, requiring a fully vetted analysis of what is working/not working," Duffy urged. "It's not too late. It really isn't."
Mary Auestad Arnold is VP/publications at CUES.
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