Very interesting results come forth when analyzing the combined 2016 call reports for banks, thrifts, and credit unions with a historical perspective. Instead of forecasting 2017 from a crystal ball I have decided to use our data resources to share insights, coupled with gleaned intelligence and key takeaways from 2016.
First a few words on the overall. U.S. financial institutions number fewer now than in 1904, 112 years ago. There were 12,839 financial institutions, and the population was 82,166,000—about 6,400 people per institution. Today financial institutions number 11,985 and population is 324,119,000, with 27,000 people per provider.
7 key insights from 2016
Here are some key details to ponder, with some takeaways for potential action:
1. Countertrend in branching.
Overall the number of branches has fallen to 113,006, which is approximately the same number as in 2006. Interestingly the number of bank branches has fallen 6.0% since 2012, while the number of credit union branches has increased 5.8% since 2012.
Takeaway: It may be less costly for a credit union to buy a bank branch than build or lease. Conversely banks have a ready market for branches with credit unions. Do it right and both banks and credit unions can win.
2. Credit unions and thrifts have tied.
Assets of credit unions in 2016 are $1.3 trillion. Thrifts are almost exactly the same at $1.3 trillion. Banks are at $15.5 trillion. Since 2015 bank assets have grown 4.8%, while credit union assets have grown 6.1%, and thrifts 6.3%.
Takeaway: 2017 will likely be the first time that credit unions exceed thrifts in total assets and move into second place behind banks. Politically significant?
3. Growth trends suggest strategies.
For banks and thrifts with assets less than $500 million, year to year total assets fell 2.60%. Only those credit unions below $100 million in assets showed a decrease in assets of 2.58%.
Takeaway: The actions taken by some credit unions to buy community banks, especially those under $500 million in assets, is good preparation for a potential change in the fabric of financial services, and a good investment if the price is right—and don’t forget thrifts.
4. For many, interest margins may not be improving.
Federal Reserve Chairman Janet Yellen’s increase in the Fed funds rate in December 2015 triggered a 0.05% or 5-basis-point increase in interest income for all financial institutions, and a 2-basis-point increase in interest expense.
However, adding provision for loan losses and security gains & losses, the net interest margin (NIM) decreased for all financial institutions by 2 basis points.
Important to note: Banks had a large decrease in NIM offsetting the increases in NIM by thrifts and credit unions.
Takeaway: The banks are more reflective of the NIM trend and all financial institutions should expect NIMs to continue to fall in the future. There will be a few exceptions. Remember, price in financial services is determined by fees, rates, and balances. This is most successful when each price produces revenue, which is in balance with the other two.
5. Banks may gain the upper hand over thrifts and credit unions.
Non-interest expense—for the first time since the start of the Great Recession in the autumn of 2008—is less than net interest margin for all financial institutions.
Banks cut their expenses 4.00% in 2016, and thrifts cut expenses by 2.73%. Credit union expense stayed the same. Bank expenses are 16.3% less than credit unions expenses and 14.0% less than thrifts. The difference is taxes. When taxes are added banks are the same as thrifts and credit unions.
Takeaway: What if President Trump eliminates taxes for community banks or banks less than $10 billion in assets? [Read my earlier blog, “Should credit unions be taxed?”]
This would be done to stimulate small business lending, which would significantly increase jobs—a campaign theme of the new president. Credit unions and many thrifts would be at a competitive disadvantage. Banks would be able to charge 0.50% less for loans. Alternatively, or in addition, they could pay 0.50% or more for deposits than credit unions and thrifts.
Is it time for credit unions and thrifts to cut expenses up to 20% or more?
6. Credit unions have a weak spot.
Credit union service charge income on deposits, in a relative sense, comes in 190% higher than that of banks and thrifts combined. All financial institutions have seen service charges on deposits remain about the same in the past year.
Takeaway: Credit unions are at risk if service charges on deposits should decline, because service charges represent 80.2% of net income for the entire credit union movement. In contrast service charges to net income for banks is 22.0% and for thrifts 7.8%.
What if the CFPB issued a regulation restricting the price charged for an overdraft to zero or free? Credit unions would be in grave difficulty, while banks and thrifts would not be.
7. Credit unions lean most heavily on deposit fees.
Total fee income for all financial institutions is 141% of net income. Credit union total fee income is split: 48.8% comes from service charges on deposit accounts, and 51.2% comes mainly from loans. Only 15.5% of total fee income for banks comes from deposit-related service charges, and, among the thrifts, only 6.7%.
Takeaway: Contrary to the opinion of the general media—and the Consumer Financial Protection Bureau—consumers can expect fees to rise. Financial institutions need to do this to increase net income to support growth in capital at banks and thrifts as a way to manage institutional risk. Thus far, service charge fee income actually has not recovered from pre-Great Recession levels.
With the total number of financial institutions in the U.S. falling under 12,000, management needs to sort out what is important for the future.
Clearly, the numbers show that efficient use of people, branches, and technology is a priority. A better balance of fees, rates, and balances is needed to reduce risk and increase productivity.
The basic business of financial services is controlling expenses, staying competitive with rates, and knowing the bottom line comes from fees.
Happy New Year,