Expense Control Critical to Positive ROA, But How Important is ROA Anyway?

While banker attacks, potential taxation, and other external, non-controllable issues do present serious challenges to the credit union system the more serious internal and controllable challenge is to diligently focus on EXPENSE control. As the NIM (net interest margin) decreases due to cost of funds and the need to remain competitive in the lending and investment arena, statistical data (see NCUA Letter #06-CU-15) indicates credit unions’ NIM, as of June 30, 2006, dropped another 5 basis points, while operating expenses increased by 5 basis points, a full 10 basis points swing. Yes, credit unions are partially offsetting the pressure on earnings with increased fees and other income streams, but this too presents another external challenge; concerns over non-related business income. A New Measure Is Needed

When the entire NIM (3.24% for 2005, now 3.19% in 2006) is needed to fund operating expenses (3.24% for 2005, now 3.29% in 2006) where do you go? Factor in the free revenue earned from reserves and undivided earnings and the problem exacerbates. Perhaps the ROA, while important, should become a subordinate measure of the CAMEL rating. A better measurement, I suggest, is the “Operational Efficiency Ratio (OER).” This ratio expresses the portion and percentage of the NIM and other income that is needed to fund operating expenses. Well-run credit unions maintain an OER in the 55% to 65% range. This translates into an ROA well above the 0.86% reported in the June 30, 2006 NCUA letter.