Jan 01 2005

Predicting and Managing a Credit Union's Expense Ratio

Report  
Number  
105

This monograph reports on research that has created a new tool to help credit unions manage their expenses, as measured by the expense to asset ratio.

Joanne M. Doyle
James Madison University
William A. Kelly, Jr.
Center for Credit Union Research
University of Wisconsin-Madison
Report Number 105

Executive Summary

The purpose of this research is to identify and measure the strength of factors influencing credit union expense ratios. In the current environment of narrowing interest margins for financial institutions, credit unions face increasing pressure to manage their expense ratios. Cutting expenses has become an important focus for managers and directors, and developing effective strategies to achieve that goal is even more critical.

What is the research about?

The operating expense ratio (operating expenses divided by average total assets) is a popular expense management tool involving both a numerator and a denominator. Sometimes, however, managers and regulators underestimate the importance of the denominator in formulating business strategy. They may concentrate on slashing operating expenses to achieve a lower expense ratio without fully considering alternative approaches.

The research for this report involved examining a wide range of potential predictors of expense ratios including total assets, deposits and loans per member, loan to asset ratios, delinquency rates, real estate loans, auto loans, average wages, products and services offered, sponsor subsidies, branches, and characteristics of the field of membership.

What are the credit union implications?

Most credit unions pay close attention to their expenses, and the most widely used measure of expense management is the ratio of operating expenses to average assets, referred to here as expense to asset ratio. Many CEO’s believe this ratio should decline as asset size increases. However, seeing the expense ratio exclusively as a function of asset size assumes that nothing else significantly affects the ratio.