Credit union marketers must grow beyond ad buys, graphic design, copywriting, brochures, web design, SEO, SEM, and PR. A marketer must understand what Key Ratios they can impact and how. Knowing how marketing impacts the financials will dramatically change the conversation marketers have with the CEO and CFO. Here are five Key Ratios that Marketers need to watch:
The formula is Net Worth / Average Assets = Capital Ratio. Capital Ratio is essential because to stay out of harm’s way with the examiners, this ratio must be over 7%. If it falls under 7%, the examiners are going to be telling you what to do to improve your capital strength. Ideally, most credit unions want to be between 9-10%. The Capital Ratio goes down when a credit union is not making enough money to cover their expenses, or there has been significant growth in deposits without comparable loans. The two remedies for a low Capital Ratio are to cut costs (marketing is seldom a protected group when this happens) and shrink assets (the quickest way to shrink assets is to run off deposits, and this tests member loyalty). Marketing needs to know this number and market away from deposits when the credit union has a lot of liquidity (cash) and low loan volume plus seek ways to do more with less budget and staff. If the credit union is lending out their deposits, then to grow capital, they need to help increase profit by marketing profitable products and free fee-based products and services to the membership.
The formula is Total Loan Balances / Total Deposit Balances = Loan-to-Share Ratio. The loan-to-share ratio is essential because credit unions make most of their money by loaning member deposits to other members. Since credit unions charge more for loans than they pay for deposits, this difference is net interest income (NII). The ideal loan-to-share ratio is 80-90% and varies according to the credit union’s Asset Liability Management strategy. Marketers need to know this ratio because if this ratio is low, they need to market for more loans; get those deposits loaned out.
The formula is Delinquent Loans / Total Loan Balances = Delinquency Ratio. This ratio directly impacts the credit union’s provision expense. The higher the delinquency ratio, the more money has to be expensed to cover potential loan losses (provision expense). If delinquencies increase, provision expenses increase, and the expense ratio rises to make the credit union less efficient. Marketers need to know this so they can target more loans from A and A+ borrowers and focus more on secured loans (auto, equity, mortgage) and less on unsecured loans (signature, credit card). Typically your A and A+ borrowers don’t just walk in the door and ask; they can get a loan at a reasonable rate anywhere. The challenge for marketers and loan executives is to make the offer for this A and A+ borrow very compelling, so they think of you first when they are ready to borrow money.
Average Loans Per Member
The formula is Total Loan Balances / Total Number of Members = Average Loan per Member. In the 5200’s Ratio Report, there is a peer category for each ratio. A marketer should know how their average loan per member compares with the peer. If it is less than the peer, the quick math multiplying this difference times the number of members = loan opportunity. You’ve got to work with lending to figure out how we can capture a greater number of loan balances from our members. Is it our pricing, our product, our sales processes, or we need to do a better job of marketing. Lists you might want to consider to capture more loans per members are:
- Loans approved but not taken
- Loan application started but not completed (where did they drop out of the process and why)
- Aged auto loans
- Households with only one or no auto loan
- Households with no credit card
- Households with no mortgage with you, held or sold
- Households with inactive credit cards
The formula is Total Expenses / Average Assets = Expense Ratio. The expense ratio is important because a credit union’s expense ratio will drive many decisions. Think about it this way; if a credit union down the street has an expense ratio of 3.27% and your expense ratio is 4.77%, it costs this local competitor 150 basis points less than you to unlock their doors every day. 1.5% of a $100M credit union = $1.5M! That is a huge advantage your competition is realizing! This advantage gives them more flexibility with rates, fees, and operating expenses, like investing in new hardware or software. A lower expense ratio impacts your ability to compete on price and service. Marketers need to know this, so they understand the importance of efficiency and effectiveness in their marketing spend. Plus, if your credit union’s expense ratio is high, getting budget dollars or staff is going to be tougher. Knowing this ratio will continually remind marketers how important marketing results and ROI are; if it doesn’t yield a conclusive result or benefit, quit doing it.
As marketers, we need to know how our credit unions measure success and failure and understanding these five ratios will help us do the right things when marketing our organizations.