Introducing CUGAR: Recognizing credit unions built for growth

Which credit unions are growth leaders?

I’ve spent a lot of time lately thinking about how to help credit unions and challenger banks grow and stay competitive. This has led me to ask a critical question - which credit unions are best at delivering an effective growth strategy?

This is my first cut at answering the question using publicly-available financial data. And, I’ll be the first to admit, some the results surprised me!

Introducing CUGAR

Introducing the Credit Union Growth Alignment Rating. The CUGAR estimates a CU’s readiness to grow across three categories:

• Track record of organic (non-merger) asset and revenue growth
• Diversity of revenue streams
• Financial capacity to fund growth

Designing the CUGAR

How can historical and publicly-available data be used to predict future growth? The CUGAR assesses six metrics grouped into three axes. Each axes receives a score between 0 and 10, which then combine into an overall CUGAR out of 10.

The three axes are:

1. Historical Organic Growth (Heavy weighting)
The best predictor of future performance is recent performance. In this case we look at two factors: organic (non-merger) asset growth and organic revenue growth. This is calculated via CAGR from the previous three fiscal years (2019-2022) with merger growth removed. Financial institutions where asset growth exceeds 10% and revenue growth exceeds 20% receive a full 10.

2. Revenue Diversity (Medium weighting)
Credit unions with a range of revenue sources are more resilient and provide more opportunities to deepen member relationships. Revenue diversity can be achieved in a number of ways. Examples include mortgage vs unsecured lending, personal vs business members and interest vs non-interest revenue. Depth of a member relationship is also important. It’s easier to sell a third or fourth product to a member vs. going from one to two.

It’s difficult to go in and assess every credit union’s product mix, so in this case we look two indicators: 1) the share of operating revenue coming from non-interest sources and 2) assets per member. To receive the full 10 points, credit unions must generate >50% of revenue from non-interest income, and have assets per member >$100k.

3. Internal Capacity to Grow (Medium weighting)
If you want to grow, you need a way to fund and deliver it. That means efficient operations and strong capitalization. Credit unions receive a 10 score in this axes when efficiency ratio is <50% and total risk-weighted capital ratio exceeds 18%.

Scale check

How do non-credit union FIs rank on the CUGAR scale? A fair measuring system would anchor the big banks at around the middle of the range, with room for smaller competitors to place higher or lower.

This holds up when the formula is applied to three bank competitors and a cooperative peer. Scotiabank’s Canadian Personal & Commercial business - a very large and mature operation that is by all measures a successful business - scores a 5.5. EQ bank, a nimble challenger, rates higher with 7.5. ATB rates 4.2 while Desjardins comes in at a strong 6.4. 

Note that, as expected, each FI has different areas of relative strength based on their specific strategy. Scotia and Desjardins are a well-rounded competitors, while EQ excells in a limited range of products:​

When applied to credit unions, large (>$3B) CUs with publicly-available data range from 7.5 to 1.7, with an average of 4.6. Meanwhile, small CUs in $500M-$3B asset range come in between 7.9 to 1.1, with an average of 4.5.

Usage and Limitations

How is CUGAR useful? It can be used to identify market leaders, and provide some initial guidance on why they are successful. For example, a niche CU with high growth and low diversification can be a solid strategy, assuming they truly are best in class at serving a specific set of products to their community. Meanwhile, a large institution with a wide range of products and strong balance sheet can find success delivering an excellent full-service experience.

CUGAR is one tool credit unions can use to compare themselves against peers and competitors, and see where there are opportunities to strengthen their growth capabilities. Credit unions can also track their results over time to see if they are trending in the right direction.

​I haven’t run a regression on historical data to see how predictive this score is. I would also caution readers to directly compare credit union scores against each other without considering the whole picture. A niche credit union in downtown Winnipeg will have a very different market, cost structure and growth path vs. a regional Atlantic counterpart.

Who are the CUGAR leaders? We'll cover that in the next Insight.