By Ken Levey
As market conditions continue to evolve, today’s institutions face a dynamic landscape burdened with pressures on margins and loan credit quality, restrictions on capital and directives to reduce expenses. Profitability and cost management are now at the forefront as credit unions work to build their balance sheets and thrive in this challenging environment.
Credit unions’ profitability management practices have been cyclical for the past several decades. Proactive CUs are now embracing a funds transfer pricing (FTP) approach that analyzes how the various contributors to net interest margin impact overall profitability, as the starting point to profitability management.
To fully understand how a credit union’s members, branches, products, officers and channels impact its bottom line, it is critical that the institution implements all the components of an actionable profitability framework. Those components include FTP as well as expense and income allocations, assignment of capital, and reporting and analysis.
Credit unions that also measure performance that is inclusive of risk characteristics will be better prepared to address changes in regulatory requirements and evolving market dynamics, which is paramount in today’s complex economic climate. Additionally, an actionable, comprehensive profitability framework:
- Helps executives understand the true drivers of cost and profitability in the institution.
- Reveals which parts of the institution generate increased member value.
- Shows which products and members are most profitable.
- Helps identify the true cost of providing support services.
- Assists in analyzing how shared services are being consumed.
It is important to note that the success of an actionable profitability framework relies on the credit union’s ability to disseminate this information to all areas of the institution. Empowering front-line staff with this knowledge enables them to assess the profitability of potential offerings at the member level. Involving the entire institution in the development of a credit union’s profitability models and assumptions will result in a more seamless and successful implementation of these newfound practices.
While the benefits of implementing an actionable profitability framework reverberate throughout an institution, there is certainly no “one-size-fits-all” approach to profitability management. Some credit unions – or even different lines of business within a particular credit union – may need to focus on certain components or dimensions specific to them. Regardless, at the end of the process, the end-goal is ultimately the same for every institution: to produce quality, actionable information that drives better decision-making.
Credit unions that embrace more meaningful profitability management will find themselves at an advantage over other institutions that simply focus on volume-driven growth without regard to contribution. Clear and consistent visibility into profitability across the institution is imperative to making informed decisions to improve the bottom line.
Ken Levey is the industry vice president of Financial Institutions for Axiom EPM, a provider of financial planning and performance management software for financial institutions. For info: www.axiomepm.com.