LAS VEGAS - This is "Go Time" for credit unions, and they need to change the way they do business.
That was the flatly stated message from Peter Duffy, who told attendees of an educational session at the recent National Directors' Convention here ROA the time-honored yardstick for credit union success, should be pushed aside for a new acronym just one vowel different-ROE, or "Return on Equity."
Duffy, an associate director at investment bank Sandler O'Neill, said ROE, calculated by dividing income by capital, is "one of the best measurements to tell which company is growing more effectively by using capital. ROE makes a credit union, or any company, consider the sources and uses of capital.
"In a commodity business, growth is Job One," he added. During a session that later was described as a "kick in the pants" by a credit union board member, Duffy urged credit unions to unearth their sacred cows and slaughter them. He insisted the single-biggest weakness in the CU industry is marketing. In addition, he challenged credit union boards and management to be aware of how their CU is different from competing financial institutions.
"Do you know your credit union's unique selling proposition?" he asked the audience. "The cost of differentiation, and the meaning of differentiation, are important. The next three years are an opportunity for growth. Will your credit union take advantage?"
From 2001 to 2006, the U.S. economy, stock market and home prices rose to remarkably high levels, even as inflation remained low. Duffy said interest rates were so low, money was practically free. In the resulting "house of cards" people felt rich and acted rich, while they borrowed to consume. During this time, he continued, CUs joined in the celebration. "Loan-to-share went way up, but loan-to-share is not the true measure of success: market share is."
Today, Duffy said CUs are fighting earnings pressure from the "nefarious combination" of pricing competition and margin erosion. He predicted the cycle will be tough to break, as consumers now "ruthlessly" shop for the highest deposit rate and lowest loan rate.
For starters, Duffy recommends credit unions stop their "over-reliance" on peer analysis. He said market share is much more significant. Duffy said the "average" competitor has grown significantly in recent years, meaning it is time to dust off Donald Trump's "You're fired" catchphrase to underachievers.
"It is about time to put people on notice in this business," he declared. "If your credit union's growth has averaged below 10%, then whoever is advising the credit union on financials should be fired."(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com/ http://www.sourcemedia.com/
