NEW YORK — Standard & Poor's Ratings Services recently gave the corporate credit union system an overall solid bill of health but noted that competitive pressures and “isolated cases of increased risk taking” are beginning to cause concern.
While corporates' low risk profile, strong liquidity, and sound financial position will buoy corporates for now, the S&P analysts said concerns over competition and some increased risk “have resulted in our longer-term outlook for the industry turning negative.” However, these concerns were not enough to change any of the current ratings or outlooks for the individual rated corporates.
Association of Corporate Credit Unions Executive Director Brad Miller stated, “As I look at the report, overall my sense was really positive given all the things happening in the market.”
According to the S&P report, “During the past several years the corporates have been subject to a slowly evolving structural transformation that, to varying degrees, is wearing down their historically strong franchise and weakening some corporates' otherwise strong financial condition. Specifically, heightened competition and increasing demands from members are weakening the financial and business profiles at most rated corporates. During the past several years, increased competition and the costs of regulatory compliance have driven up costs and hurt profit margins to varying degrees at all rated corporates. While still gradual, the pace of this change has increased as the breadth and intensity of competition has ratcheted up with members becoming increasingly demanding of their corporates.”
It continued, “We are concerned because this dynamic has caused some corporates to increase risks both in the interests of serving the members and simply to earn supplemental revenue. Most of the risk taking has been incremental and largely within the corporates' ability to manage–current mortgage-
backed fixed-income securities market upheaval not withstanding.”
S&P expressed greater concern over loan participations and “other loan products that are outside their traditional business.” The ratings company report stated, “We believe that corporates are not properly capitalized or experienced in such lending and would view negatively any growth in these programs beyond their current limited size.”
Additionally, S&P noted the fairly recent ability of credit unions to use corporates other than their local one, “thus the historically close bond between members and their corporate is not what it once was. Corporates are therefore less able to rely on their members' goodwill and inertia to maintain them.”
S&P concluded, “Because these continue to be slowly occurring changes, assessing the ultimate tipping point is much like counting straws on the camel's back. It would take a rather prolonged and painful shakeout among the corporate credit unions to alter the industry's current trajectory and reduce the number of corporates needed to restore a healthier competitive landscape. In the meantime, the industry is likely to face increasing competitive pressures. As we continue to watch the trend unfold, we will closely monitor not only the financial profiles of the rated corporates but also their competitive positions and level of
member support.”
Acknowledging some of the negative points made in the report, Miller said that they are nothing new. Regulatory burden continues to grow year after year and the corporates, some of which have had national fields of membership for years, have encountered competitive pressures along the way. Additionally, adapting the rating system to the cooperative corporate credit union model has consistently led to differences in for-profit and not-for-profit philosophies, such as returning as much as possible to the membership.
Miller added, “I wonder if, given what's
happened across the markets, they [S&P] aren't just being cautious.”
“We do need to continue to evolve with the needs of the credit unions,” Miller highlighted, which means taking on new products and services and other challenges, but nothing the corporates cannot handle. Based on our regulatory structure, he asserted, corporate credit unions are “very well capitalized.” Still he pointed out that a risk-based capital structure would be better and the issue “hasn't fallen off our radar by any means,” but a specific proposal is not currently
before NCUA.
Charles D. Rauch, an analyst on the report, was unavailable for comment at press time.
Miller explained that the corporate credit unions obtain these ratings in case the need arises to tap the capital markets. “It's done from a liquidity standpoint. Not all corporates try to go out to the capital markets,” he pointed out. Of the 29 corporate credit unions, 12 are rated–four long-term and eight for short-term and commercial paper.
With less than half of the corporate credit unions represented, Miller observed, “S&P tries to extrapolate across our industry, right or wrong.”
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