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Return On Equity: Its Significance to Credit Unions

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BY ALEC HOLLIS

If your credit union is evaluating the keys to success in 2016, don’t bypass return on equity. In the New Year, profitability should be viewed as a service to members rather than taking away from them. Learn more about this often overlooked metric and how to leverage it to your CU’s advantage.

As 2015 comes to an end and lenders begin to focus on 2016, readdressing what it takes to make a credit unionsuccessful may be timely.While many characteristics of a successful credit union are thought to be intangible and culturerelated, let’s not forget profitability and recall a concept that sometimes takes a backseat in credit union performance reporting: return on equity (ROE).Because credit unions are member owned, shareholders’ equity can be replaced with members’ equity. Ultimately, credit unions should consider profit orientation as continued value enhancement to members.

Conventional industry thinking sometimes associates profitable credit unions with “taking from the members”; hogwash!An institution with a lower ROE is generally in a riskier position than one with high capital returns and does a disservice to its members.Remember, while the additional risk of low profitability may not be measured within an interest-rate risk framework, it must be considered.An institution that is barely breaking even is not building its capital base to ensure it can meet its liabilities down the road, which presumably would increase at least with the rate of inflation.It may also lack resources to stay up to date with technology and other service advancements, leading to additional risks related to security and member satisfaction. Profitable institutions often possess more funds to invest in technology that will enhance business flow and member-centric services.Furthermore, they are better equipped to instill members’ confidence in the security of their assets,improving their capability of making a difference in their local community.

This content is for CU BUSINESS eMagazine , Special Deal: 2 websites , and NEW! The Leadership Team Builder Group Subscription members only.
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