The Operating Expense Ratio and the Efficiency Ratio are the two most common metrics that credit unions use to track their own efficiency. Both metrics declined (improved) in the second quarter from levels posted in March (Note: For these two metrics, a lower figure is better) According to Callahan & Associates' First Look Program.
Opex Ratio Down as Operating Expense Growth Slows
The average operating expense ratio as of June was 3.19%. This marks not only an annual decline from the 3.32% reported in the previous June, but also a slight quarterly decline from the 3.22% these same credit unions reported in the first quarter.
Strong asset growth is the driving force behind this decline, up 9.2% annually. This growth outpaced growth in operating expenses of 4.6%, a marked slowdown from the 7.8% annual growth these credit unions reported in the previous year. This slower growth in operating expenses is largely due to smaller increases in salary and benefits and an actual decline in travel and marketing expenses.
Efficiency Ratio Explained
The Efficiency Ratio is becoming popular in the credit union market because it measures how much a credit union is spending in order to earn a dollar of revenue. For example, an efficiency ratio of 88% suggests that it costs a credit union 88 cents in order to drive a $1 in revenue, explaining why lower is better for this metric.
The formula for the efficiency ratio is Operating Expenses divided by Net Interest Income (without Provision Expense) plus Fee Income plus Other Operating Income [or, by account code = a671/(a116+a131+a659+a300)].
Through June, the First Look credit unions reported an average efficiency ratio of 69.3%, down from 73.8% in the first quarter. This improvement is part "bookkeeping" and part "real." The denominator of this ratio grew due to a large increase in Other Operating Income from credit unions accounting for write-downs taken at the end of 2008. However, even when we take this into account, credit unions still posted a decline in the Efficiency Ratio in June.
If you would like to learn more about these ratios, you can watch a 12-minute CUtv Short in which I discuss these ratios in detail using 4Q08 data.