BIRMINGHAM, Ala.-Shrinking the balance sheet and focusing primarily on item processing may not be a business model that helps corporates survive, and may likely lead to more consolidation.
Thomas Bonds, CEO of Corporate America CU, cautioned that without strong balance sheets to support item-processing costs, some corporates may not be able to compete effectively against other item processing providers.
"There are two ways to drive down the cost of services, one is volume and two is balance sheet. If you are not doing balance sheet, you better have volume," said Bonds. "If you don't have the volume to reach the critical mass you will be trying to compete against organizations that do have the volume or the balance sheet and you will be higher in your fees."
Bonds pointed out that Corporate America continues to maintain a strong balance sheet ($3.2 billion). "We will continue to manage a large investment portfolio and provide good solid returns to our members. We just rolled out a registered investment advisory company. Investments are a large part of our business plan going forward."
Corporates with business models that don't rely much on the balance sheet may eventually come to a tough conclusion, offered Bonds.
"When they begin assessing their income statements and recognize they don't have the investment income, their net interest income is not very good, they are not paying really good dividend rates, and they are charging fees that are lot higher than their competitors, they will see that their business model has to change," Bonds said. "And the way to change it is to go back to balance sheet, which a lot of corporates will be loathe to do, or to consolidate so they can capture additional volume."
With many corporates limiting how much they will take in through deposits, the only place for CU liquidity to flow is to banks, pointed out Bonds. "That is not something that I think is conducive to the long-term viability of the credit union industry. It would not kill the system, but we would not be as strong as we otherwise would be. So I am hopeful as the corporate system progresses forward and capital positions build, these corporates that are restricting deposits from members will ease off on the restrictions and we will capture and manage more funds within our industry."
Some Projections Are 'Pollyanna'
Corporate America finds itself in a good capital position, not shrinking its balance sheet and posting a 4% leverage ratio that Bonds expects to move to 5% before year's end. As for the future of the corporate system, Bonds feels it certainly will weather its recent trials but become a bit smaller in the process.
"We will not see the carnage that a lot of people were predicting," offered Bonds. "But it is a little Pollyanna to say there will be 23 to 25 corporates 10 years from now; it will probably be half that amount. Consolidation will gradually happen after this next wave of mergers-there are probably four to five in the works right now, and I don't have any information to support that, just what I am assuming. After that the downsizing will occur more due to true business combinations in order to get more volume."