This report features quantitative financial analysis to determine what effect credit card lending has on participating credit unions. All data used to calculate the metrics within this report is from the June 30, 2012 credit union call reports collected by the National Credit Union Administration (NCUA). The data was then scrubbed for accuracy by Callahan & Associates. Four peer groups are used throughout the report: credit unions with credit card loan balances making up at least 8.5% of the total loan portfolio (high concentration), credit unions with credit card loan balances making up between 4.5% and 8.5% of the total loan portfolio (medium concentration), credit unions with credit card loan balances making up less than 4.5% of the total loan portfolio (low concentration), and credit unions that do not participate in credit card lending. The peer group of credit unions that do not participate in credit card lending was adjusted to include credit unions between $50 million and $1 billion in assets so that it allowed for a closer average asset size to the credit card lending peer groups. Credit unions that have sold their credit card portfolio within the last seven years were also excluded from these peer groups to remove the risk of skewed performance.
This report is broken out into three main sections: balance sheet metrics, income and expense metrics, and member relationships. This allows for a look at what is happening on both the balance sheet and income statement of credit unions, as well as how they are cultivating connections with members. The metrics that are examined within each section have been selected due to their direct relation to credit card lending or importance to the overall health of credit unions.
Balance sheet metrics are crucial when considering credit union performance because the balance sheet shows whether the credit union is growing in size and whether they are able to convert deposits into loans. Asset growth is a particularly important balance sheet metric, as it shows that members are utilizing their credit union more often and therefore are helping it grow.
Metrics related to the income statement are examined in the income and expense section. Credit unions have to remain profitable, because due to their charter they are unable to raise outside funds and must rely on retained earnings to generate capital. There may be variations between individual credit unions or peer groups based on their business model and what services they offer their members. Some income and expense metrics, particularly return on assets (ROA), need to be viewed in light of a credit union’s unique strategy. If a credit union is strongly focused on returning potential profits to its members through no fees, high deposit rates, and/or low lending rates, this strategy may result in a lower ROA relative to industry peers.
Credit unions’ continued success is dependant on forming deep and profitable relationships with their members today. Consumers have many choices when it comes to financial institutions, but an increasing number of consumers are turning to credit unions due to the emphasis placed on member value. As credit unions typically offer lower fees and more personalized service, credit unions should continue to see growth in their member base.
The results in almost all of these areas pointed to credit unions with some form of credit card portfolio exceeding their non-credit card lending peers. Credit unions with credit cards posted positive balance sheet growth through the end of the second quarter, and that growth was, on average, above the growth of peers with no credit card lending. Within income and expense metrics, credit card lending credit unions again trended above their peers for many metrics. They posted especially impressive numbers for non-interest income based metrics, a key area for credit unions as the low interest rate environment carries on. Member relationship metrics were nearly all in favor of credit unions that offered credit cards, reinforcing the value that credit cards can have for a financial institution.
The conclusion that can be drawn from the financial analysis for this report is that there is no single metric that can be the deciding proof about the value of credit card lending. Numerous metrics must be considered when seeing the impact credit cards can have for a credit union. After looking at components from the balance sheet and income statement and seeing credit card peer groups excelling in many of these areas, the value of credit card lending becomes clearer.
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