7 takeaways from 2016 for 2017

This article was originally published on Banking Exchange. It was adapted and reprinted with permission.

Interesting results surface when analyzing the combined 2016 call reports for banks, thrifts, and credit unions with a historical perspective. Instead of forecasting 2017 with a crystal ball, I have decided to use our data resources to share insights, coupled with gleaned intelligence and key takeaways from 2016.

Here are seven key insights from 2016 to ponder, with a few 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. The number of bank branches has decreased 6 percent since 2012, while the number of credit union branches has increased 5.8 percent over the same period.

Takeaway: It may be less costly for a credit union to buy a bank branch than to 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. Credit unions’ assets in 2016 totalled $1.3 trillion, drawing even with thrifts. Banks were at $15.5 trillion. Since 2015 bank assets have grown 4.8 percent, while credit union assets have grown 6.1 percent, and thrifts have grown 6.3 percent; however, thrift assets overall are down because of mergers and acquisitions by banks.

Takeaway: This may be the first year that credit unions exceed thrifts in total assets and move into second place behind banks. Anyone see the potential for political significance there?

3.   Growth trends suggest strategies. For banks and thrifts with assets less than $500 million, year-to-year total assets fell 2.6 percent. Only those credit unions below $100 million in assets showed a decrease in assets of 2.58 percent.

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. Acquiring thrifts may be an option as well.

4.   For many, interest margins may not be improving. Federal Reserve Chair Janet Yellen’s increase in the Fed funds rate in December 2015 triggered a 0.05 percent or 5 basis point increase in interest income for all financial institutions, and a 2 basis point increase in interest expense. However, adding provisions for loan losses and security gains and losses, the net interest margin decreased for all financial institutions by 2 basis points. It is important to note that banks had a large decrease in NIM offsetting the increases in NIM by thrifts and credit unions.

Takeaway: 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, pricing in financial services is determined by fees, rates and balances; successful pricing strategies produce revenue via one component in balance with the other two.

5.   Banks may gain the upper hand over thrifts and credit unions. For the first time since the start of the Great Recession in 2008, non-interest expense is less than net interest margin for all financial institutions. Banks cut their expenses 4 percent in 2016, and thrifts cut expenses by 2.73 percent. Credit union expense stayed the same. Bank expenses are 16.3 percent less than credit unions expenses and 14 percent less than thrifts. The difference is taxes. When taxes are added, bank expenses total 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? This could done to stimulate small business lending, with the ultimate aim of increasing jobs—a campaign theme for the new president. Credit unions and many thrifts would be at a competitive disadvantage. Banks would be able to charge 0.50 percent less for loans. Alternatively, or in addition, they could pay 0.50 percent or more for deposits than credit unions and thrifts. Is it time for credit unions and thrifts to cut expenses up to 20 percent or more?

6.   Credit unions have a weak spot. Credit union service charge income on deposits, in a relative sense, comes in 190 percent 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 percent of net income for the entire credit union movement. In contrast, service charges to net income for banks is 22 percent and for thrifts 7.8 percent.

What if the Consumer Financial Protection Bureau issues a regulation restricting the price charged for an overdraft to zero or free? Credit unions would be much harder hit than banks or thrifts.

7.   Credit unions lean most heavily on deposit fees. Total fee income for all financial institutions is 141 percent of net income. Credit union total fee income is split: 48.8 percent comes from service charges on deposit accounts, and 51.2 percent comes mainly from loans. Only 15.5 percent of total fee income for banks comes from deposit-related service charges, and among thrifts, only 6.7 percent.

Takeaway: Contrary to the opinion of the media—and CFPB—consumers can expect fees to rise. Financial institutions need 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 has not recovered from pre-Great Recession levels.

With the total number of financial institutions in the United States on the decline, 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.

Mike Moebs’ economic research firm, Moebs $ervices, Lake Forest, Ill., has provided data, information and intelligence to government agencies, news outlets and thousands of financial institutions. The former credit union director and bank director holds several patents on risk management for loans and overdrafts.