By Rich Weissman
While credit and asset liability risk measure risks in the balance sheet, “profit risk”—a term coined by DMA—refers to the concentration of different streams of profitability within the income statement.
This new and key measure of risk addresses the degree to which a credit union can (or cannot) ensure sufficiently diversified profitability flows that will, in turn, sustain the income statement over time.
For example, we helped a client credit union discover that most of its branches were unprofitable. Additionally, the profit that did come in was concentrated with a handful of members in just a few of its branches—an unhealthy situation, to be sure.
We worked closely with the CU to redesign its branching footprint based on profitability potential. This resulted in branch relocations and entry into new, more profitable market areas. Because of these efforts, branch profitability across the network of branches has significantly increased, and most branches now positively contribute to the income statement.