MADISON, Wis. (1/29/13)--Credit unions must approach benchmarking differently than for-profit institutions and focus on sustainability rather than the bottom line, according to a new Filene Research Institute report.
The endgame for credit unions is sustainability--generating profits so that the institutions can continue to provide benefits to members and jobs for employees, Filene said in "Improving Peer Group Analysis for Credit Unions."
The credit union system dynamic suggests six core areas to focus on benchmarking activities and asking themselves some tough questions:
1. Asset growth: Where is the asset growth coming from (e.g., loans versus investments) and how does our growth compare to our peers?
2. Product mix: How does a credit union's product mix compare to its peers, especially with respect to capital-efficient products that provide noninterest income?
3. Interest rates: Who has the best rates and why? (The report suggests focusing on forward-looking offer rates rather than backward-looking portfolio rates.)
4. Operating expenses: Who has the best efficiency ratio and why? Does the efficiency ratio tell a credit union everything it needs to know? (The report says no and suggests an alternative measure.)
5. Credit losses: How does a credit union's delinquencies and net charge-offs compare to its 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.
6. Capital adequacy: How does the institution's total and risk-weighted capital compare to its peers?
Filene suggests two ways to frame the benchmarking process: member value-assessment and venerable SWOT (strengths, weaknesses, opportunities and threats) analysis.
Member-value assessment looks at the benchmarking process through the prism of providing maximum member benefits. Given the sustainability mandate, it focuses on how a credit union, relative to its peers, is managing the trade-off between--for instance--providing a large patronage payment and the consequences of that for sustainability.
The SWOT analysis approach compares a credit union's performance with that of peers in each of the six core areas. SWOT then labels each sub-area as a member benefit, improvement opportunity, or a boost to return on assets.
The benchmarking process does have some pitfalls. If credit unions choose the wrong peers, they could learn the wrong lessons. Credit unions of similar size could have different strategic visions, commitments to branch networks or membership bases.
Other pitfalls are: Measuring too many factors; failing to properly understand the context of their peers' successes and failures; relying only on annualized data that mask misleading one-off gains or losses; or failing to ask enough "why" questions.