6 What-Ifs for Your Financial Reforecast
September 8, 2022
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5 minute read – The Fed rate increases have been more aggressive than most anticipated back in 2021 when institutions were preparing their financial forecasts. As a result, you may be looking at a financial reforecast. In a 3–5-year forward-looking view, these what-ifs can help tell the story of which forces your structure can withstand well, and which might call for mitigation strategies. Note that if you’re only updating the 2022 budget, these what-ifs won’t have as much impact, which is why a 3–5-year forecast is so beneficial.
Consider these what-if ideas:
- Deposits decrease as inflation chews into members’ checking and savings balances
- Deposits increase in a flight to safety
- Market area deposit rates increase as competitors vie for deposits
- Consumer lending drops off along with mortgage lending
- Credit losses kick in
- Market rates go back down
The industry is facing uncertainty on several fronts and the what-ifs are intended to test what could happen if some of the uncertainties materialize. Team conversations can start with these areas of uncertainty:
Deposit Balances
Deposits grew at unprecedented rates after the pandemic, but what will happen next is in question. Customer deposit balances could dwindle as the result of inflation as people spend more on almost everything. It’s also possible that a recession could cause deposit balances to grow through a flight to safety, putting more pressure on already-diluted net worth ratios.
Deposit Rates
Many organizations do not currently need deposit growth to support lending, so they don’t expect to increase deposit rates much, now that market rates are rising. But there are some that do need deposits and will likely increase rates to get them. If a major competitor in your area increases rates, ask yourself if you would increase rates to stay aligned with your value proposition and/or reputational purposes, or let some deposits go. If you’ll let some go, also ask how much before you’d take action to stop it.
If you need deposits, consider that competitors that don’t need deposits might raise their rates to stay in line with the market and/or their value proposition, which could mean your organization having to raise rates higher than planned in order to get needed deposit growth.
Lending
Mortgage lending predictions have been revised downward as mortgage rates have risen and the market has remained stubbornly low on inventory. Some could see an increase in home equity products, as people who might have moved stay put in order to keep their low-rate mortgages. But consumer lending is facing uncertainty as well. With inflation eating into disposable incomes, many could put off that new car or other purchases. At the same time, volumes could shift more toward unsecured and credit card lending if people are struggling to make ends meet.
Credit Losses
It seems like the industry has been waiting for the other shoe to drop on credit losses since the pandemic hit. It’s possible that government stimulus postponed that, but inflation could push some people over the edge. Don’t forget to factor in the impact on CECL.
Market Rates
The buzz is all about rates going up, but if recessionary forces begin to take hold, the Fed could pull back on rates. For a long time, the only direction rates could go was up, so don’t forget the other side of the equation.
The value in modeling these types of what-ifs is in the team conversation and thought process, as well as the forecast results. Part of the conversation should revolve around any risks the team thinks need to be addressed, identifying options, and determining timing for implementing the options, if necessary.
Your situation is unique so be sure to think about other what-ifs that are relevant to your organization. Also combine the what-ifs you think could happen concurrently to get a view of the aggregate effects.
One way to meet the uncertainty of the environment is to play out major possibilities through what-ifs. You won’t be able to anticipate everything that might come along, but looking head-on at various possibilities can bring calm and confidence. It also helps teams to move into action cohesively to mitigate risks where needed.
