HealthScore Chart of the Week: Credit Union Efficiency

This week’s HealthScore Chart of the Week focuses on credit union efficiency, specifically looking at the comparison of individual credit union HealthScores to credit union efficiency ratios.


The Efficiency Ratio shows, in cents, approximately how much it costs to produce each dollar of revenue. It is calculated by dividing operating expenses (not including the provision for loan loss expense) by operating income. A lower ratio generally indicates better “efficiency” in managing the expense/income relationship.

This week’s chart illustrates an interesting issue in the credit union community. Namely, the number of credit unions with efficiency ratios in excess of 100% (or in other words, the number of credit unions spending more than $1 to earn $1). We will save you the hassle of counting the dots. There are over 1,600 of them.

Of course the chart also shows that the majority of credit unions have “normal” efficiency ratios, but given the large number of institutions represented in the chart it is difficult to gain an appreciation for the distribution of ratios for this group. The chart below is included to provide additional insight. It shows only credit unions with efficiency ratios at or below 99.9%.

Interestingly there are many credit unions shown in the chart with incredibly low efficiency ratios but generally average health. Why? There are two likely drivers:

  1. Credit unions in this segment enjoy some degree of operating expense subsidy from their core sponsor, meaning that credit union operating expenses, and consequently efficiency ratios, are stronger than peer credit unions.
  2. Such credit unions, in our experience, lag in other components of our score system such as loan and deposit relationships and membership growth. These lagging scores serve to offset expense/efficiency/income strength and drive scores closer to the average.

It is worth noting that in almost every case credit unions that are higher on the HealthScore score distribution have efficiency ratios below 80%. This is impressive when you consider the industry average in the first quarter was over 90%. Financial institutions such as these, capable of spending less than peers and competitors to produce similar revenue, have a distinct competitive advantage.

Comments and interpretations welcome. To share your thoughts, use the comments feature below.

Interested in learning more about where your credit union stands in relation to Glatt Consulting’s Credit Union Industry HealthScore? Schedule an appointment to discuss your scores. You may also want to learn more about our approach to credit union strategy consulting.

Data is as of 3/31/2013

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