By Rich Weissman
While credit and asset liability risk measure risks in the balance sheet, “profit risk”—a term coined by DMA—refers to the concentration of different streams of profitability within the income statement.
This new and key measure of risk addresses the degree to which a credit union can (or cannot) ensure sufficiently diversified profitability flows that will, in turn, sustain the income statement over time.
For example, we helped a client credit union discover that most of its branches were unprofitable. Additionally, the profit that did come in was concentrated with a handful of members in just a few of its branches—an unhealthy situation, to be sure.
We worked closely with the CU to redesign its branching footprint based on profitability potential. This resulted in branch relocations and entry into new, more profitable market areas. Because of these efforts, branch profitability across the network of branches has significantly increased, and most branches now positively contribute to the income statement.
Here’s the problem in many credit unions:
- Only a handful of members are profitable.
- Most products, markets, branches, and sales officers are unprofitable.
- Most credit unions don’t have the capacity to measure these concentrations.
Credit unions need to appreciate that profit risk is the next generation of risk management, and that they need a system that pulls together detailed transaction data with member activity and a full understanding of each component of the income statement for all aspects of margin, non-interest income and non-interest expense. This highly detailed approach allows for analysis of each account in the credit union, and it needs to be measured and managed each month.
Unfortunately, most credit unions assess profitability in a manner far too simplistic. Most have a patchwork of one-time studies, high level assumptions or values derived through spreadsheets, or other simplistic methods. This approach leaves the credit union vulnerable.
Rich Weissman is president/CEO of DMA, Portland, Ore., and a national leader and expert in profitability analytics. DMA provides highly sophisticated profitability systems and tools to credit unions and banks in the U.S. and Canada. DMA’s IDM™ (Integrated Database Management) system is award-winning, enterprise-wide, and focused on improving earnings and capital through superior profitability analytics.
Attend the CUES School of Growth and Profitability in May 2013 in Chicago.
