Business Irish

Sunday 23 October 2016

Credit Unions' brave new world: tougher rules will see the number of individual branches shrink to make way for super-credit unions

Battered by the downturn and tougher regulation, the credit unions are struggling to adapt to a new environment, which has seen 40 branches close in the year, writes Dan White

Published 10/01/2016 | 02:30

Will these new modified credit unions — community banks, by another word — be able to preserve the credit union ethos — or will they end up resembling larger banks? If they do end up merely aping their larger competitors, then something unique will have been lost. Photo: Jaren Wilkey/BYU
Will these new modified credit unions — community banks, by another word — be able to preserve the credit union ethos — or will they end up resembling larger banks? If they do end up merely aping their larger competitors, then something unique will have been lost. Photo: Jaren Wilkey/BYU

Just after Christmas the Department of Finance announced that the state guarantee on credit union deposits would be capped at €100,000. This came on top of the introduction of new Central Bank regulations at the beginning of the year and imposition of a new industry levy on the sector in November 2015.

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In common with the rest of the financial sector the credit unions had a rough time after the Celtic Tiger bubble burst in 2008. At one stage credit union arrears were running at a truly horrifying 20pc of all loans.

Several credit unions got into serious difficulties. Liquidators were appointed to Berehaven Credit Union in July 2014 while Newbridge Credit Union was taken over by Permanent TSB the previous year as part of a shotgun marriage that cost the taxpayer over €27m.

Two other credit unions, Killorglin and Howth Sutton, also had to be bailed out at public expense.

One consequence of the credit union bust has been much tighter regulation of the sector. This in turn has led to a drastic reduction in the number of credit unions, down to 339 active credit unions today from 379 a year ago, and 423 as recently as 2012.

And this process of consolidation is almost certainly set to continue as the increasing regulatory burden makes it impossible for many smaller credit unions to maintain their independence.

In a recent submission to the Oireachtas Committee on Finance, Public Expenditure & Reform, Registrar of Credit Unions - the Central Bank official in charge of credit union regulation - Anne Marie McKiernan pointed out that 170 credit unions have assets of less than €25m.

It is these smaller credit unions who have average assets of just €12m, who will find it most difficult to survive.

"These credit unions often face particular challenges, given their limited capacity to make the necessary resource and financial investments to develop new products and delivery channels, which would best position them to attract and retain younger active members", was how Ms McKiernan diplomatically described their predicament to the Committee members.

On the other hand a relatively small number of credit unions have large balance sheets with just 37 credit unions each having over €100m of gross assets.

Between them these 37 credit unions, just over 10pc of all credit unions, control over 40pc of the sector's assets.

The future for credit unions is almost certainly going to be one of being beautiful. The traditional parish or workplace credit union will increasingly give way to a relative handful of super-credit unions, each with assets of several hundred million euro.

These super-credit unions will be able to offer their customers a wider range of services and be better equipped to meet the Central Bank's increasingly demanding regulatory regime.

This trend has been criticised by all of the major credit union representative bodies. In a joint statement last July they strongly attacked the new credit union regulations that were due to come into force at the beginning of the New Year. The new regulations would, they said, "restrict" access to savings and credit.

"These new regulations will ensure that credit unions are restricted from competing effectively with other financial service providers into the future.

"Credit unions have proven in the personal loan market that they offer exceptional value. Credit unions are now looking to provide more services to their members and their local communities at fair and reasonable rates - instead the draconian rules published today will restrict credit unions from offering real choice to members".

Finance Minister Michael Noonan has instructed the Credit Union Advisory Commission to deliver a report on the implementation of the new regulations by June.

Credit Unions are hoping that, what they call, the "one size fits all" regulation proposed by the Central Bank, will be replaced by "tiered" regulation with the smaller credit unions being subject to a less onerous regime.

With very high levels of arrears the credit unions have, like all other lenders, been reducing the size of their loan books.

From €7bn in 2008, total credit union loans have now shrunk to just €4bn. This represents just 28pc of their combined €15bn of gross assets, a remarkably low percentage.

This is creating problems for the credit unions. The low proportion of their total assets being lent to members means that they are not receiving the loan interest which they need to pay interest to their depositors. To make up for the shortfall in loan interest payments, credit unions had been relying on income from their investments instead.

Unfortunately the collapse in bond yields means that this source of income has been drastically reduced. Throw in higher cost/income ratios, resulting in part from tighter regulation, and the future viability of many of the surviving credit unions remains in serious doubt.

Kevin Johnson, the chief executive of the Credit Union Development Association, which represents several of the larger credit unions, sees the current situation as representing an opportunity for the sector.

In most countries credit unions lend between 50pc and 60pc of their gross assets. If this situation were replicated in Ireland then credit union lending would rise from the current €4bn to somewhere between €7.5bn and €9bn. At a time when the surviving banks are still shrinking their loan books, the injection of an extra €3.5bn-€5bn of extra personal credit into the lending market would be a welcome boost for many hard-pressed households.

However, mindful of the sector's previous experience, Mr Johnson stresses that any increase in credit union lending must be done in a prudent and responsible manner. The case for increased credit union lending is reinforced by the fact that loan arrears have been falling sharply as the economy recovers and now stand at an admittedly still high 13.5pc.

While the credit union movement sector didn't escape unscathed from the economic downturn, it should be stressed that most credit unions managed to avoid the worst excesses of the banks.

When the Government set up the Credit Union Restructuring Board in 2012, the new body was allocated €250m of public funds to clean up the sector.

At the time there were many who wondered if this would be enough. More than enough as it turned out. The Restructuring Board has now almost completed its task and will shortly be returning €230m to the Exchequer.

Even when one takes the differences of scale into account, the net €20m cost to the taxpayer of bailing out the credit unions was small beer compared to the gross €64bn that fixing the banks cost.

A big problem for many credit unions is their ageing membership, both depositors and borrowers. They have found it very difficult to compete with the banks for younger depositors and borrowers in the social media era.

As against that the credit unions enjoy a level of consumer trust and loyalty that the bigger lenders can only dream about. In a survey of Ireland's top 100 brands conducted in 2015, the credit unions came out on top.

"Credit unions are deeply embedded in the communities in which they operate.

"They are member-owned organisations which provide a personal financial service to their customers. Like most of the top performers they scored very highly on empathy, which is something you can't buy or recreate through advertising," said Inga Ryan, director of CEXI, the company which conducted the survey.

The challenge for credit unions is harnessing the undoubted goodwill that exists towards them and their strength in local communities to successfully target a new generation of members. Arguing with their regulator is almost certainly not the way to do this. Tighter regulation for all lenders - large and small - is here to stay.

What we are likely to see is the evolution of the larger credit unions into community banks offering their members a much wider range of financial services, while the smaller credit unions that do manage to survive will confine themselves to a much narrower range of products.

Will these community banks be able to preserve the credit union ethos or will they end up resembling the larger banks? If they do end up merely aping their larger competitors then something unique will have been lost.

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