5 Ratios Every CEO Must Know
The most effective chief executive officers have a high-level understanding of everything happening at their institution. To aid them in their duty, CEOs can use the following metrics to achieve baseline knowledge about the general health of their credit union.
1. LOAN GROWTH
Definition: Loan growth is the period-to-period change of loans outstanding.
Several factors contribute to loan growth. The economy and the membership’s confidence in its ability to manage debt affects the overall market for loans, as does demographic factors such as the number of borrowing age members, membership affluence, and cultural attitudes toward debt and borrowing. But internal factors influence this ratio, too, such as the credit union’s appetite for risk, marketing effectiveness, product development, sales culture, and delivery channel usage.
2. SHARE GROWTH
Definition: Share growth is the period-to-period change of total share balances.
As with loan growth, several factors contribute to share growth. These include the economy, the socio-economic status of a credit union’s membership, and the credit union’s ability to pay market rates and gain market share. It is important to monitor this ratio in relation to marketing efforts for deposit products. In recent quarters, credit unions have had minimal challenges making loans but have had more difficulty bringing in sufficient deposits to maintain their loan-to-share ratio. As a result, individual institutions have inched closer to being “loaned out,” which is when the loan-to-share ratio is equal to or greater than 100%. Moving forward, share growth will be a major factor in determining whether a credit union can continue to make loans at the pace the market demands
3. ASSET GROWTH
Definition: Asset growth is the period-to-period change of total assets.
Both internal and external factors affect asset growth. External factors include the economy as well as the makeup and size of a credit union’s field of membership. Internal factors include the quality of member service, the menu of products available, and the credit union’s pricing philosophy. The ability of the credit union to increase its asset base has a direct impact on how well it is able to scale its operations and control expenses. With more assets comes, presumably, more income. This in turn enables a credit union to earn more income for every dollar it spends on operating costs.
4. MEMBER GROWTH
Definition: Member growth is the period-to-period change of total member.
A credit union’s business strategy is a major driver of its member growth. More effective strategies for a given marketplace typically yield stronger member growth. The board’s philosophy toward service levels, delivery channels, product pricing, and breadth of services also influence member growth. Typically, credit unions with substantial indirect lending operations have stronger member growth rates than peers without such programs. Although this is a good strategy to recruit members, credit union management must work to convert these new members to users of additional products and services.
5. ROA
Definition: Return on assets (ROA) is an institution’s annualized net income divided by its average total assets.
ROA is an important gauge of a credit union’s profitability. It indicates how efficiently management is running the credit union by measuring how much income is generated from every dollar of assets deployed. In general, a high ROA relative to peers shows management is efficiently using assets to generate income. However, credit union leaders need to view ROA in light of their own institution’s distinct strategy. For example, if a credit union passes along potential profits to members — such as through minimal fees, high deposit rates, and low lending rates — then its strategy might result in a lower ROA relative to its peers.