“My investment portfolio is not working for me!”
March 22, 2013
This is a statement heard more frequently in the past couple of years. For those thinking it, here are some questions worth considering.
Question 1: Is my lending process working for me?
The economy shows glimmers of improvement, with home values up and consistent increases in new auto sales as some evidence. Before turning to investments, make sure your core business is maximized. It is important to count your business – every day; as noted in the article Thriving In A World Of Shrinking Margins, questions to consider include:
- How many loan applications are we getting? How many are we approving? How many are we funding?
- If our approvals are low (compared to the number of applications), are we attracting the wrong borrowers and, in the process, hurting our reputation?
- If our funding rate is low (compared to the number of approvals), what can we do to improve it?
Question 2: Is my business model working for me?
If you feel your loan department is doing the best it can, then a bigger question may need to be asked: Are we chasing the right target market? Consider that, at the end of 2000, the credit union industry had 20% of its loans in new autos and 20% of its loans in used autos. Fast forward to 2007, as the recent recession was about to flex its muscles, the numbers had dropped to 16%, respectively. As of September 2012, the percentages stood at 10% and 18%, respectively. The numbers represent a declining market share in new autos.
Count your business and find other numbers that can tell a story:
- How many branch transactions do you have today relative to just 3 years ago?
- How many online banking and mobile transactions do you have today compared to 3 years ago?
- Segment your borrowers by age and you may be surprised that your borrowers are not as young as you think.
The trends in auto loans, branch use, electronic transactions and the shifting demographic of borrowers are signs that a business model that was successful in 2000 may need some fine tuning for a sustainable future.
A fine-tuned business model may realign priorities and resources and you may not need to rely so much on your investment portfolio.
Question 3: Is it a good thing that my investment portfolio is not working for me?
Some credit unions have a high loan-to-asset ratio and strong earnings and still feel like they’re leaving money on the table because their relatively small investment portfolio is earning little. Before focusing on the performance of one slice of your financial structure, understand how the whole structure is working together. It may be that a low-yielding investment portfolio may be providing you with interest rate risk protection you need from the longer-term loans you made for the benefit of your membership.
