Borrowing Rates Are Up – Other Impacts to NEV
August 15, 2013
Continuing with our message from last week, if you are running NEV, there are some other changes you will notice as a result of borrowing rates increasing. As pointed out last week, NEV calculations for the current rate environment will result in shares showing increased value as “market rates” (generally represented by borrowing rates) have risen relative to dividend rates. However, in a +300 bp rate change, the percentage decline in value of shares will actually decrease when compared to your last NEV calculation. This is because a 300 bp change represents a smaller proportional change when you are starting out with a higher discount rate. The overall impact to your NEV results will depend on changes in your balance sheet, but there will be less decline in share values to offset declines in asset values when compared to using lower borrowing rates in your last NEV. Understanding this may help you interpret some of the nuances of your NEV results; however, it will not tell you if your credit union is positioned to make money or not.
