LAS VEGAS - The president of one corporate credit union is urging credit unions to maximize their balance sheets by better utilizing "leverage."
Moreover, said Lee Butke, president of Columbus, Ohio-based Corporate One FCU, added that growth should not be pursued for growth's sake, growth should be a strategy to create value for members.
Butke defined "leverage" as growing the liability side through the acquisition of deposits or by borrowing, also known as "funding."
"There are two ways to get money, or liability: get shares or borrow," he noted. "Leverage gives a credit union money to grow the asset side-loans and/or investments. Leverage is a good strategy that will improve a credit union's value over time."
Butke recommended CUs introduce a new value-creation measure, "Return on Equity" or ROE. Butke believes ROE is a more significant standard than Return on Assets (ROA) as ROE measures how much is earned on the capital a CU's members have given it to create value.
"Why is this important? Because credit unions are overcapitalized based on common-sense standards," he declared. "The liability side is what drives credit unions, and by measuring return on equity, members have a more valuable institution in the end as ROE improves."
While many CUs view 1% ROA as their primary goal, Butke said this figure is not a "magic" number. Instead, he told attendees of an educational session at the recent National Directors' Convention here, credit unions should manage to their individual number, not an average number.
"Don't let anyone tell you ours is a dying industry-this is our moment in the sun," he said. "Our balance sheets are in the best shape ever, while banks are deleveraging. Banks either aren't making loans, or are adding ridiculous risk premiums."
One caution from Butke: CUs should be careful when introducing both credit risk and interest rate risk at the same time. In either event, he continued, funding is the key. He recommends credit unions hire a chief funding officer ("You already have a chief loan officer," he pointed out) and discuss a basic question at their next board meeting: who is responsible for the overall cost of funding?
"Can your credit union afford to do a savings promotion? The real question is, can you afford not to? Calculate the ROE," he said. "Leverage creates greater value, satisfies borrowers and benefits savers."(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com/ http://www.sourcemedia.com/
