The California Department of Financial Institutions (DFI) announced that it is incorporating the efficiency ratio into its examination of state chartered credit unions.
The state regulator noted that examiners often commented on credit union efficiency, but were not able to quantify performance. Using the efficiency ratio will give examiners another tool to better identify and communicate the earnings performance of credit unions.
Specifically, the efficiency ratio measures the cost of generating an additional dollar of revenue. The efficiency ratio equals total non-interest expense divided by [(total interest income - total interest expense) + fee income + other operating income + other non-operating income].
The DFI stated that the efficiency ratio has a long history of being used within the financial services industry as a key earnings metric, although NCUA does not consider it a key ratio. The DFI , however, stated that the efficiency ratio is only a part of the picture and does ignore non-financial considerations by credit unions.
As of June 2011, the unweighted average efficiency ratio for the credit union industry was 90.53%. The median efficiency ratio for the credit union industry was 86.10%.
As a general rule, the larger the credit union, the lower the efficiency ratio.
Below is some benchmarking statistics by asset size groups as of June 2011.
For credit unions with $1 billion or more in assets, the average efficiency ratio was 66.30% but half had an efficiency ratio in excess of 66.59%. Credit unions with an efficiency ratio at or below 60.10% were in the top (first) quartile. Star One Credit Union had the lowest efficiency ratio at 27%, while Indiana Members Credit Union had the highest efficiency ratio at 93.10%.
For credit unions with assets between $500 million and $1 billion, the average and median efficiency ratios were 73.60% and 73.94%, respectively.
For credit unions with assets between $250 million and $500 million, the average and median efficiency ratios were 76.61% and 77.91%, respectively.
For credit unions with assets between $100 million and $250 million, the average and median efficiency ratios were 79.90% and 80.08%, respectively.
For credit unions with assets between $50 million and $100 million, the average and median efficiency ratios were 83.29% and 84.05%, respectively.
For credit unions with assets between $10 million and $50 million, the average and median efficiency ratios were 87.17% and 87.4%, respectively.
For credit unions under $10 million, the average and median efficiency ratios were 103.16% and 93.75%, respectively.
Since I'm not used to looking at efficiency ratios it's hard to put this in perspective. Can you provide the same breakdown for banks?
ReplyDeleteThe unweighted average efficiency ratio for the banking industry was 71.88 percent and the median efficiency ratio was 78.06 percent.
ReplyDeleteThis made news in the credit union space, in part because it is a false indicator of purpose and mission, effectiveness, efficiency and of true institutional health.
ReplyDeleteThe better measurement for credit unions and cooperative banks is the Return to Members, not earnings performance as if a for-profit, or generating additional dollars or revenue beyond strategic Net Worth targets.
Perhaps this will just become an additional and unnecessary paperwork burden--which is the best outcome. The worst would be the California regulator mandating the diversion of returns to members of credit unions, in order to drive excessive revenue to the bottom line, so as to over-protect the regulator's back-side, and the CU deposit insurance fund.
Look like a case of a state employee bringing what they know to the job, rather than learning what they should know to do the job right.