Industry Trends: Investments (4Q19)

Prioritizing liquidity to navigate the uncertain economic climate, institutions allocated a higher percentage of investments toward shorter-term products in 2019.

Investment portfolios across U.S. financial institutions adjusted to three 2019 rate cuts by the Federal Reserve. Prioritizing liquidity to navigate the uncertain economic climate, institutions allocated a higher percentage of investments toward short-termproducts of less than one year. This was exacerbated by a flattened and sometimes inverted yield curve in the back half of 2019.

Key Points

  • Investment balances at credit unions grew 11.1% annually to $389.3 billion, the highest annual growth rate since June 2012.
  • Credit unions allocated most new investments to cash and investments with maturities of less than one year. These accounted for 52.3% of the portfolio at year-end, the highest fourth quarter concentration since 2009and up from 47.7% last year.
  • On the back of three mid-year rate cuts, average investment yields fell to 2.37% from 2.42% three months ago. This is the first quarterly decline since the third quarter of 2016.
  • Increased loan demand at the end of 2019 incentivized credit unions to repurpose cash balances toward lending in lieu of investments. The weighted average life of credit union investment portfolios stayed flat quarter-over-quarterat 1.91 years. The shift to short-term investments, however, pushed the average maturity down 0.17 years annually.

TREASURY YIELD CURVE RATES

FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.19
Callahan & Associates | CreditUnions.com

The yield curve normalized following multiple inversions in the second half of 2019 but remains flat historically.

INVESTMENT COMPOSITION

FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.19
Callahan & Associates | CreditUnions.com

Cash as a percentage of total investments has grown from 19.0% to 25.5% over the past five years. The percentage allocated to government agencies and banks has fallen the most in response.

AVERAGE LIFE OF INVESTMENT PORTFOLIO

FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.19
Callahan & Associates | CreditUnions.com

Cash balances and lending both increased in the fourth quarter of 2019, causing the average maturity of the portfolio to remain flat over the past three months but dip 0.17 years over the past 12.


The Bottom Line

Credit unions alleviated some liquidity pressure in the fourth quarter of 2019. At 83.9%, the loan-to-share ratio decreased annually for the first time since 2012. Additionally, an increase in investment balances largely in cash and sub-one yearmaturity investments reflected the industry’s desire to retain liquidity. Correspondingly, the weighted average life of credit union investments decreased 0.17 years over the past 12 months to 1.91 years as of Dec. 31, 2019.

Given the uncertainty related to the impact and duration of the COVID-19 health crisis, combined with the significant rate cuts enacted by the Federal Reserve in March 2020, investment portfolios will likely shift in the coming weeks and months as creditunions seek to find optimal combinations of liquidity and earnings in response to the changing borrowing needs of their members.

This article appeared originally in Credit Union Strategy & Performance.

April 16, 2020

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