Credit unions: New report assesses challenges, opportunities

Sector's assets totalled nearly $280 billion by the end of the year, study shows

Credit unions: New report assesses challenges, opportunities

It’s now “crunch time” for Canada’s credit unions, according to a new CD Howe Institute report that indicates regulatory challenges, higher competition and digital advancements are all causing increasing headwinds for that lending sector.

The report, authored by Marc-André Pigeon (pictured top) and Murray Fulton of the University of Saskatchewan, analyzes the performance of a growing sector in Canadian banking between 2012 and 2019 and shows that the country’s largest credit unions are performing “reasonably well” compared with the banking Big Six.

Still, governance standards and practices of credit unions need to continue evolving to meet the realities of the changing market – although Pigeon told Canadian Mortgage Professional that the strong focus placed by credit unions on their governance had been clear throughout the study.

“The most surprising thing was just how thoughtful most of the [larger] credit unions are around governance. They really think hard about how they can get the right people on board, but they also respect the democratic structures that are foundational to who they are,” he said.

That can be a tough balance to achieve, he said, particularly because credit unions have their own processes and methods for selecting board members and individuals can’t simply be handpicked as in a conventional corporation.

Among the larger credit unions, a significant share of board members had comprehensive formal governance training, Pigeon said, although a challenge arose where governance courses were geared towards conventional businesses rather than cooperatives.

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Canadian credit unions’ assets totalled nearly $280 billion by the end of 2021 outside of Quebec, with western provinces including British Columbia, Manitoba, and Saskatchewan boasting large market shares.

One area the largest credit unions could improve on, though, is return on assets, according to the report’s authors. Over that 2012-19 period, credit unions averaged a return on assets of 0.49% compared with 0.85% at the country’s largest banks – and it cost significantly more for credit unions to get a dollar of revenue compared with banks.

That said, Pigeon also noted that while return on assets and efficiency ratio numbers for credit unions appear much less healthy than at banks, that’s partly because a lot of what banks show up in those numbers comes from the disproportionate strength of their investment banking sides.

“[Banks] also own big insurance operations, and the credit unions generally dabble,” he said. “They have the depth. Some of them have little venture capital firms, but they’re tiny – nothing like an investment bank.

“And so those investment banking entities spin out huge amounts of free and clear cash that goes right to the bottom line. It helps juice the return on assets, helps get the efficiency ratio down, and that’s where a lot of the difference comes from.”

Removing that consideration from the banks means that they start looking a lot more like the credit unions – but that doesn’t mean the latter shouldn’t be paying attention to the superior financial performance of banks, according to Pigeon.

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“These are averages, so individual credit unions may be a little less efficient than they could be, and they need to ask themselves: ‘Is that something that we’re doing by design or by accident?’” he said.

“If it’s by design, that’s fine, because the business is a purpose-driven business. Maybe you’re giving your members better rates on loans or you’re paying more on deposits or you’re paying more out in patronage dividends, you’re giving back more to the community or you’re doing something that’s affecting your bottom line.”

That’s a reflection of a fundamental difference between credit unions and banks in Canada, Pigeon said – that banks will tend to ask themselves whether they’re being as efficient as possible for investors and able to return as much money in the form of dividends or share price appreciation.

Cooperatives and credit unions, by contrast, do focus on returning profits to members – but also on supporting communities in ways that are perhaps “less visible” to banks. Unlike banks, it can also be more difficult for credit union members to monitor their board, Pigeon said, especially with a smaller volume of data coming out because they’re not required to report quarterly.

“If no-one’s watching other than the regulator, then there’s a risk that there could be a little bit of cost creep that’s not purpose-driven,” he said. “So I think boards need to really be mindful of that, and I think that just underlines one of the reasons you want better data available.”