To compete effectively with big banks, many credit unions are turning to
The time to act on these deals might be sooner rather than later, according to Peter Duffy, managing director for Sandler O’Neill in New York. Two of the main drivers for CU mergers are a desire for economies of scale and a lack of organic growth.
“The BB&T-SunTrust merger tells you what is going on – they don’t think they are big enough, and that is a big deal,” Duffy said during a breakout session at the recent CU Leadership Convention in Las Vegas.
Those who are watching the fundamentals have the chance to drive the change, while those who are not paying attention run the risk of falling behind, Duffy warned.
“Understanding the drivers is important, along with knowing if those drivers are long-term or short-term,” he added.
For the first time in history, the large banks are out paying credit unions on deposits, Duffy continued. He said the DNA of banks has been “rewired” by regulations, and they now are offering higher deposit rates to solve their liquidity issues.
Another factor working against smaller financial institutions: Most other countries have more potential members and customers per financial institution than in the U.S., Duffy said. After decades of consolidation, “we are not going to go the other way,” he warned.
Back in 2010, fintech had 20% of U.S. residential mortgages, and 20% of consumer loans. Those figures are up to 52% each today. That’s more than banks and credit unions combined.
“You have already been disrupted, you might not know it,” Duffy said to the credit unions in the audience. “Fintech is a big deal and it is here to stay. While the banks and credit unions have been fighting each other over the credit union tax status, fintech took market share with no tax and hardly any regulations.”
Technology makes it easy for consumers to shop for the best deal, which Duffy said drives down return on assets. He said the battle for America’s deposits is going to be the “final straw” in the drive for consolidation.
“Consumers want to open their door, see a branch at the end of their driveway, trip over ATMs on their way to that branch, and score a loan on their phone before they get to the branch,” he said, half-jokingly.
Buyer or seller?
There is no perfect answer as to which credit unions should be a buyer or a seller, Duffy said. He noted there are a number of credit unions that are underperforming, and said those institutions are facing an “increasingly difficult” task of meeting member expectations while maintaining return on assets.
“It is costing more every day to run the place, pay staff and invest in technology,” he assessed. “The best time to strike a deal if you are a seller is in a seller’s market, and we are in a seller’s market now. We will not be in a seller’s market for long. At some point a bell will ring, and more and more institutions are going to make a decision to merge into a larger institution. At that point the seller will have less leverage.”
Duffy cited four high-level choices for potential mergers: stay the course, continue to find merger partners, join another institution or convert to a bank.
“There is a tightly wound spring of consolidation, and it is about to pop,” he asserted. “What are you going to do about it? You can kick the tires on a deal and wait for another day. You need to continue to have discussions about this, because if you fall behind it is going to be hard to play catch up.”
