Monday 21 May 2018

Capable credit unions can play vital part in shaking up bank-led mortgage market

There is a crying need for more competition in the mortgage-lending sector to meet housing needs. Stock image
There is a crying need for more competition in the mortgage-lending sector to meet housing needs. Stock image
Richard Curran

Richard Curran

Credit unions are preparing to ramp up their mortgage lending this year by around €400m - well, some of them are anyway. The plans to expand mortgage lending are being hatched by a number of credit unions which have identified this important market as a potential high-growth area for them.

But there are problems. The credit union movement is still dealing with the aftermath of the financial crash, which has resulted in increased mergers, new internal systems, greater external controls through regulation and very strict rules.

Credit union bodies continue to criticise what they see as excessive rules governing how much they can lend in mortgages. These cover what percentage of their loan book can be awarded for longer-term lending.

They want the rules loosened up and say they have around €5bn in total which could be lent out, much of it for mortgages.

In one sense it looks like a win/win for everybody. We have a tight mortgage market dominated by a handful of banks, therefore increased competition from credit unions would be good for consumers.

We also have a credit union movement which is still grappling with its own business model and desire to stay relevant - especially to younger people in communities.

Yet, it isn't that simple. There are larger, more successful, better-run credit unions, which are more than capable of handling a greater volume of mortgage lending - and there are smaller credit unions still dealing with bad loan provisions, a dwindling customer base and finding it difficult to reach new customers.

For example, in 2015 some 37 credit unions with assets of over €100m controlled 42pc of the sector's total assets. There has been a shift away from longer duration loans, such as 5-10 years, to smaller value loans of a shorter duration of less than one year. This creates problems in the business models of different size credit unions.

Furthermore, many credit unions with plenty of money to lend, are not managing to lend it. In 2007 49pc of all assets were loans - the main source of income for credit unions - and this had dropped to just 26pc by 2015.

Of the 105 countries where credit unions operate, only five had a loan-to-asset ratio lower than in Ireland.

However, put another way, credit unions have tonnes of money available to lend but restrictions, rules, a changing market place and some inertia in getting their message out has really affected many of the smaller ones.

The Central Bank has gone through the credit union movement like a dose of salts since the crash. Many feel aggrieved at the level of what they see as "intrusive" regulation in the last eight years. The approach has been very much one of stick and very little carrot by the regulator.

In truth, it has been a complex issue. Nobody could stand over the kind of loose practices that were taking place in some credit unions, and one thinks of Rush Credit Union as a case in point.

Equally, there has been a major drive to merge credit unions as a way to increase their skill sets, efficiencies and their overall scale, which should help them invest for the future.

This was entirely necessary and has borne fruit. In many respects there are fewer but stronger credit unions. The question is how many of them are ready and equipped to plunge into the mortgage market?

There is a crying need for more competition in the sector. As of last year, AIB had 34pc of the new mortgage market. Bank of Ireland had around 26pc, while Ulster Bank had 19pc and KBC had around 12pc. Permanent TSB retained around 9pc.

So, the top three had 79pc of the market in new mortgage lending. It would be a massive journey for credit unions to make if they were to impose themselves in any kind of serious way on this market.

Some are definitely professionally and financially equipped to do this. Under an initiative by the Solutions Centre, a voluntary grouping of credit unions aimed at developing new financial products, those trading up, first-time buyers and those buying affordable homes, will be targets for new credit union mortgage lending.

The Solutions Centre provides the underwriting and legal advice to credit unions that sign up. According to Kevin Johnstone of the Solutions Centre, who is also chief executive of CUDA, they can give credit unions access to the specialist mortgage expertise.

It is a great idea, but this group of 32 credit unions want to get the rules eased. They will have to show they are capable of handling the complexity of mortgage lending. The regulators will have to be convinced of that and find a way to ensure any new rules only apply to those who can deal with it.

The credit union movement has given so much to communities around the country over decades. It continues to do so. However, it has been forced to change. Some of it has been painful and, for some, that pain isn't over.

Younger customers show very little brand loyalty these days. Communities have become more anonymous, transient and looser entities in which credit unions may find it harder to stay relevant.

Even the professional credit unions made up of the workforce of a particular company have to battle for members and customers. The absence of the job for life can affect how these credit unions retain members after people have moved on.

In a survey conducted last year by the Credit Union Advisory Committee, credit unions were asked to list the potential constraints on the development of their business. The biggest single obstacle listed was technology for service delivery, with 92pc of them ticking it as "extremely" or "quite" important.

The second biggest constraint, ticked by 90pc, was attracting and retaining young members. Economic conditions were also at 90pc, while marketing challenges came fifth and leadership within the credit union came sixth.

The regulatory framework only came in fourth at 82pc, while Central Bank restrictions came in seventh with 69pc including it as extremely important or quite important.

The difficulties faced by the credit unions in the aftermath of the financial crash have to be seen in context. Headlines of appalling mismanagement in some credit unions may give the wrong impression and embolden regulators to regulate some credit unions out of existence.

Yet, the truth is that the State set aside €250m to fund a consolidation process in the sector. Known as Rebo, the sector had more than €1bn in arrears and 51 credit unions had reserve ratios of less than 10pc, when it was set up in 2013.

Rebo's work is done and the cost of this mergers and mop-up operation to the State is set to be just €20m. Irish Nationwide Building Society alone cost us over €5bn. EBS cost another €2bn.

The credit union movement still has a vital part to play in the future provision of financial services in Ireland. From a regulatory point of view, yes there are difficulties coming up with "a one size fits all" rulebook.

But that should not hold back credit unions that are ready and able to build a solid future.

Indo Business

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