NAFCU Services Blog

Oct 19, 2023
Categories: Strategy & Growth

How Well Are You Managing Your Asset Liabilities?

By:  FIS

Financial institutions walk a precarious tightrope these days because what’s good for consumers and credit union members can be catastrophic for banking institutions and credit unions. 

Take Interest rates—they continue to creep up for lending, like home mortgages and auto loans—tamping down consumer spending in these markets. But they’re also on the rise for savings, spelling a win for consumers who are able to realize greater yield. Of course, this has an adverse impact on banks and credit unions which must continue to deliver competitive rates, resulting in the need to manage exposure to interest rate risk.   

Add to the mix consumer confidence being shaken by bank runs and financial institution takeovers. All these factors underscore the need to proactively mitigate risk to keep balance sheets in check and build member trust. 

Increasingly, asset liability management is becoming a mandate for financial institutions, and there are three key actions credit unions must take to manage asset liability in order to assure future growth. 

1.  Know Your Brand—and Add Value 

With economic volatility comes consumer confidence erosion—making the imperative to build recognition, strength and respect for your brand more important than ever. A strong brand results in engagement and loyalty. But do you know your brand—and do your members?  

A brand is more than a name and a logo. When you consider your brand’s anatomy, you must look at your past, present and future. The past is your opportunity to consider your story or narrative—its history and how it came to be. The present explores your brand’s mission. It’s the “why” of your institution and it should connect with members on an emotional level that inspires confidence and conviction for your institution. Finally, the future examines your brand promise or vision. Where are you headed and how can you add value to your members’ lives? How can you definitively communicate the difference your institution brings to the market?   

All touchpoints—from your physical locations to your digital presence online and in social media to your tech innovation—must be in sync to ensure you foster a relationship with savers and win their loyalty.  

2.  Know Your Members 

As interest rates continue their upward climb, members—not surprisingly—are chasing yield. Do you have a lens into your members and their deposits in order to develop a deposit strategy to ensure more funding stability?  

A 360-degree view of members and their deposits can curb this leakage. This enables credit unions to assess which members are likely to stay the course and those expected to flee. As you evaluate your member portfolio, you may find there are depositors you would be comfortable losing.  

3.  Creatively Approach Deposit Strategies 

Today’s members want security, liquidity and yield from their deposits, in that order.  

Members are savvy and they’re shopping around. With deposit betas still relatively low, you risk losing members if you don’t consider interest rate increases. And that attrition can result in lost opportunities to introduce these members to revenue-generating services like loans. 

Dovetailing off the directive to know your members, consider how your institution can creatively attract deposits. A strategic mix of products and offers, like referral bonuses or frictionless mobile deposit options, may be key to your deposit strategy. But it goes beyond incentivizing your current and prospective members, as these may not draw sustained and quality depositors.  

To grow deposits from existing members, leveraging member demographic data—to truly know your members—allows you to identify account segments and zero in on members likely to shop diverse products. You can also discover those seeking services that optimize the customer experience, like face-to-face interaction versus self-serve options. Personalized outreach that provides relevant, informative messaging can be the catalyst for growth. 

To gain new depositors, consider expanding your prospective member profile. By homing in on member demographics, you may learn that a segment of your individual depositors run a small business, which can be a prime candidate for deposit offers. 

In addition to these three strategies, credit unions should exercise four additional considerations when building their asset-liability management toolbox. These include reverse stress tests, interest rate exposure risk assessment, whole balance sheet analysis, and increased frequency of ALCO analysis and ad hoc stress tests. All are integral steps credit unions can and should be taking to mitigate risk. 

The time has come to start analyzing and valuing the balance sheet as a whole. Measuring your credit union’s direction for equity can give you early warning risks beyond the net interest income horizon.  

To access details on all seven tips for managing asset liabilities, download our whitepaper ALM Today Growth Tomorrow.  

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