How we see the future determines our tolerance for risk and desire for growth. If we envision a future of economic turbulence, we might be inclined to limit risk and growth for higher capital ratios.
But if we envision a future that’s dynamic, highly competitive, and demanding of greater investments in technology and human resources, we might decide we need growth to achieve scale to generate the earnings required to support rising investment and costs.
You can spot a risk-averse culture a mile away. These are credit unions that consistently underperform when compared to peers, or ignore growth opportunities in their market.
These credit unions are consistently behind the technological times because they’re holding onto capital levels that were pre-determined years ago. They have management teams that hold back and fail to be relevant in their markets. These teams focus more on what could go wrong instead of what could go right.
Establishing a reasonable tolerance for risk and growth extends beyond a board vote or affirmative consensus at the strategic planning meeting. Boards must support their own approval with action. This means having the management team’s back when performance falls short.
Assess your risk appetite
Growth strategies should have a clear purpose beyond growth just for growth’s sake. Growth makes sense for most credit unions because it’s necessary to generate the earnings needed to keep up with technology, delivery systems, human resources, and compliance.
But regardless of size, a hunker-down mentality is dangerous for credit unions.
Focus growth on a purpose, not just a number. Communicate what growth represents.
It could mean long-term survival, improved member service, stronger community investment, or a better work culture. This focus will help the board and management rally more people to a meaningful vision for the future.
Three considerations when evaluating your appetite for risk and growth:
1. Capital. Is your current capital level reasonable considering your overall enterprise risks? If not, get it there. If it is, don’t let your capital focus impede growth.
2. Earnings. Strong earnings must accompany growth to maintain a healthy capital ratio.
Do you have enough capital to support asset growth? If you have a high loan-to-share ratio and prospects for continued loan growth, make sure you have enough capital to support necessary deposit growth. You don’t want to be loaned out with a low capital level.
For example, a credit union with a 90% loan-to-share ratio and an 8% capital level might have to limit loan growth to maintain sufficient capital. But a credit union with a 90% loan-to-share ratio and a 10% capital level has more room for continued loan growth.
3. Assets. Does your loan growth drive asset growth? There’s no point growing assets without the earnings from high loan deployment to support it. Avoid asset growth until your loan-to-share ratio is high enough to warrant it.
Why it matters
High capital ratios and arbitrary growth targets can be dangerous. If you have outdated “legacy” capital targets, revisit them and make sure you’re not limiting the growth you’ll need to remain relevant.
Strategic growth supported by adequate capitalization are critical to success in a competitive market.
SCOTT BUTTERFIELD is the principal at Your Credit Union Partner (yourcupartner.org).