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Benchmarking with a Purpose. Ask 50 people what is important and what should be measured. You will get 50 different answers. Objective: Develop a benchmarking framework to guide leaders toward key aspects about strategies and operations.
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Ask 50 people what is important and what should be measured.You will get 50 different answers.
Objective:Develop a benchmarking framework to guide leaders toward key aspects about strategies and operations.
Objective is not:Detailed process metricsDetailed market analytics(narrowly focused; difficult to collect/compare)Internal policyRegulatory requirements(no universal standards; subject to interpretation)
Benchmarking must be a part of your planning process.Difficult to set a course, and monitor environment withouta reference point.
Singular Profit Mandate Maximize Return
Credit Union Dual Mandate Minimize ROA Provide tangible benefit to members Maximize ROA Stay adequately capitalized
Priority #1 Should Be… • Credit Union • Sustainability • Long Term Survival/Prosperity • Recurring Value for Members • Job Security for Employees
Industry Dynamics Circle of Life or Spiral of Death
Sustainability Benchmarks Growth Product Mix Interest Rates Capital Growth (ROE) ROE Must Meet or Exceed Asset Growth Operating Expense Credit Losses Capital Adequacy
Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy
The battle is NOT won or lost on the income statement; it is won or lost on the balance sheet.Income statement is what has happened;Balance sheet is what is going to happen.Where do you want to go?
Establish Target Product Mix Lowest Strategic Value Highest
Identify Product Mix Gaps Years to Target at 5% Growth Rate 5.6 YearsAway 4.3 YearsAway 5.1 YearsAway
Understand Implication of Gaps 75 bps Improving product mix improves ROA by 75 bps
Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy
Efficiency Ratio Efficiency Ratio Ranges > 100% Failure is Imminent 90-100% Slow Death 80-90% Skating on Thin Ice 75-80% Surviving 70-75% Thriving 60-70% Highly Productive <60% Extremely Productive (or getting greedy) • Efficiency Ratio Operating Expense as a percentage of net revenue $75 Operating Expense / $100 Net Revenue = 75% Efficiency = 25% Remaining to cover credit losses and provide capital growth
Activity Balance • Loan Balance, plus • Relationship Funding Balance, plus • Non-Interest Income Equivalent Asset Balance(Non-Interest Income / Net Interest Margin)If net interest income was an asset,how big would it be?
Activity Balance Benchmarks • Expense as Percentage of Activity Balance(expense leverage into strategic drivers) • Activity Balance per Branch(branch network leverage) • Activity Balance per FTE(human leverage)
Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy
Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy
Peer Groups Thoughts… • Rule #1: Perfect peer does not exist (Sasquatch) • Population: 10-30 Peers • Span of Data 3-5 Yr History(NEVER Annualize Current Year) • Asset/Branch Peer • Geographic Peer • Charter Peer • Custom Peer • Mixed Peer • Tradeoffs exist; can’t be best at everything. Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy
Local/regional peer may be best. Growth Industry best practice peer (indifferent to location) Product Mix Local/regional peer may be best. Interest Rates Equivalent asset/branch peer may be best. Operating Expense Local/regional peer may be best. Credit Losses Capital Adequacy Local/regional peer may be best.
Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy
Member Value Assessment • Member value is created when: • Product mix is stronger than peer/target • Interest rates are favorable to members (ROA drag) • Productivity is greater than peer • Credit losses are fewer than standard(s)
0.35% 0.35% Reduce member favorable pricing.