Interest Rates Top List of 2023 Concerns for CU Leaders

The interest rate environment is the top concern for credit union executives in 2023, according to Cornerstone Advisors’ eighth annual “What’s Going On in Banking” report released this month by the Scottsdale, Ariz.-based consulting firm.

According to the report, based on a December 2022 survey of about 300 banks and credit unions whose asset sizes mostly range from $250 million to $50 billion, 59% of credit union leaders believe the interest rate environment is of utmost concern this year – a jump from 38% in 2022. Coming in second on credit union executives’ list of top concerns was “cost of funds” (47%, a spike from 9% in 2022), followed by “weak economy/loan demand” (44%, up from 34% in 2022).

“The interest rate environment presents an opportunity to increase NIM (net interest margin), however, our cost of funds and compensation costs are eroding that opportunity,” survey participant Jenna Lampson, CEO of the $1.3 billion Pacific Service Credit Union in Concord, Calif., stated in the report. “Deposit runoff is a concern as is liquidity. We should be thrilled with the NIM opportunity, but the drag created by liquidity, comp and cost of funds makes 2023 a challenging year.”

One concern that appeared to have lessened over the past year for credit unions is the ability to attract qualified talent. While 63% of credit union executives listed talent as a top concern in 2022, just 39% did in 2023. However, staffing remains a challenge for the financial services industry as a whole – 50% of banks and credit unions stated they have experienced challenges with both recruitment and retention as a result of the Great Resignation, and 31% said they’ve struggled with recruiting only, according to the report.

When asked how optimistic or pessimistic they are about the banking industry overall in 2023, most bank and credit union respondents said “somewhat optimistic” (47%), followed by “somewhat pessimistic” (41%), “very optimistic” (8%) and “very pessimistic” (2%).

“Despite the economic projections, most senior executives at banks and credit unions appear to be somewhat optimistic about the coming year, but to give you a little perspective, the 43% who said they were somewhat or very pessimistic compares to numbers that are below 20% in prior years. So although we’re seeing a leaning towards optimism, the pessimists are growing in numbers,” Ron Shevlin, chief research officer for Cornerstone Advisors and the report’s author, noted in a webinar presentation of the report.

Other key findings based on Cornerstone’s survey of credit union executives included the following:

• Seventy percent of credit unions named growing retail deposits as a high priority in 2023 – nearly four times the 18% that said so in 2022.
• In 2022, 32% of credit unions said they expected to select a new or replacement consumer digital account opening app, and 10% a commercial/small business digital account opening app. However, only 15% and 2% did so, respectively. This year, more credit unions said they planned to select a new or replacement commercial/small business account opening app (14%), while 30% said they’d be selecting a new or replacement consumer digital account opening app.
• Another unfulfilled promise concerned real-time payments. Last year, 24% of credit unions said they planned to implement RTP, but in this year’s survey, only 12% said RTP had been implemented. Thirty percent of credit unions said they plan to implement RTP in 2023 and 35% in 2024 or later, while 23% said they don’t know when they’ll implement it and 1% don’t plan on doing so at all.
• Auto lending continues to be critical to credit union performance. Most credit union executives (68%) named auto loans as their highest-priority loan type in 2023, up from 63% in 2022. Next on the list were home equity loans/lines of credit, which 59% of credit union executives named as a high priority, followed by commercial real estate loans (33%).
• Heading into 2023, 87% of credit unions have launched a digital transformation strategy and 10% plan to develop one this year.
• Sixty-three percent of credit unions said they have adopted application programming interfaces (APIs) and 30% have adopted chatbots. By comparison, 53% and 18% of banks have adopted these two respective technologies.
• About half of credit unions (51%) believe 2023 will be more favorable for M&A activity compared to 2022, while 39% believe it will be no more or less favorable and 10% believe it will be less favorable.
• Credit unions plan to invest less in fintech partnerships in 2023 ($1.1 million) compared to 2022 ($1.19 million). Banks, however, plan to invest $3.98 million in fintech partnerships in 2023, compared to $2.98 million in 2022.