Improving Peer Group Analysis for Credit Unions
Benchmarking, when conducted appropriately, yields several benefits for credit unions. It can help credit unions identify best practices, monitor a changing landscape, test a hypothesis, define a course of action, or simply tell who you need to call to ask for their secrets.
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While these benchmarking benefits are universal, credit unions have to approach benchmarking differently than for-profit institutions where the bottom line is “the bottom line.” For credit unions, the endgame is sustainability—generating profits so that the institution can continue to provide benefits to its members and jobs to its employees. Sustainability would be easy to achieve in an unchanging world, but of course that’s not where we live. As Higgins notes, every year operating expenses increase and credit losses pull profitability down.
For Higgins, the credit union system suggests six core areas where credit unions should focus on benchmarking their activities and asking themselves tough questions, namely:
- Asset growth: Where is the asset growth coming from (e.g., loans versus investments) and how does our growth compare to our peers?
- Product mix: How does our product mix compare to our peers, especially with respect to capital-efficient products that provide noninterest income?
- Interest rates: Who has the best rates and why? (Higgins suggests focusing on forward-looking offer rates rather than backward-looking portfolio rates.)
- Operating expenses: Who has the best efficiency ratio and why? Does the efficiency ratio tell us everything we need to know? (Higgins says no and suggests an alternative measure.)
- Credit losses: How do our delinquencies and net charge-offs compare to our peers? Internally, a credit union might ask itself how it is trending (up, down, or flat) on key measures such as the weighted average credit score of loans outstanding or household income as a percentage of loans outstanding.
- Capital adequacy: How does the institution’s total and risk-weighted capital compare to its peers?